Income Taxes

12 Months Ended

Jan. 27, 2023

Income Tax Disclosure [Abstract]

Income Taxes

NOTE 11. INCOME TAXES

The Company’s income (loss) before income taxes in the United States and in foreign jurisdictions is as follows:

(in thousands)	Fiscal 2022			Fiscal 2021			Fiscal 2020
Income (loss) before income taxes
United States	$	4,646		$	52,963		$	173
Foreign		(19,325	)		(6,994	)		12,419
Total (loss) income before income taxes	$	(14,679	)	$	45,969		$	12,592

Certain foreign operations are branches of Lands’ End and are subject to U.S. as well as foreign income tax. The pretax income (loss) by location and the analysis of the income tax provision by taxing jurisdiction are not directly related.

The components of the provision for (benefit from) income taxes are as follows:

(in thousands)	Fiscal 2022			Fiscal 2021		Fiscal 2020
United States	$	(3,258	)	$	12,215	$	725
Foreign		1,109			385		1,031
Total (benefit) provision	$	(2,149	)	$	12,600	$	1,756

(in thousands)	Fiscal 2022			Fiscal 2021			Fiscal 2020
Current:
Federal	$	(3,928	)	$	11,370		$	8,334
State		(273	)		1,627			3,675
Foreign		1,125			385			517
Total current		(3,076	)		13,382			12,526
Deferred:
Federal		682			(1,426	)		(8,413	)
State		261			644			(2,871	)
Foreign		(16	)		—			514
Total deferred		927			(782	)		(10,770	)
Total (benefit) provision	$	(2,149	)	$	12,600		$	1,756

A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:

	Fiscal 2022			Fiscal 2021			Fiscal 2020
Tax at statutory federal tax rate		21.0	%		21.0	%		21.0	%
State income taxes, net of federal tax benefit		0.1	%		3.9	%		5.0	%
Foreign differential		27.2	%		(5.2	)%		2.7	%
Permanent differences		(3.4	)%		1.9	%		16.8	%
CARES Act		—	%		—	%		(24.6	)%
Uncertain tax benefits		1.1	%		1.1	%		(1.6	)%
Change in foreign valuation allowance		(32.4	)%		4.9	%		(3.8	)%
Foreign branches		—	%		—	%		—	%
Other, net		1.0	%		(0.2	)%		(1.6	)%
Total		14.6	%		27.4	%		13.9	%

Deferred tax assets and liabilities consisted of the following:

(in thousands)	January 27, 2023			January 28, 2022			January 29, 2021
Deferred tax assets
Deferred revenue	$	5,946		$	6,528		$	4,882
Legal accruals		2,053			2,461			3,551
Deferred compensation		10,246			18,328			16,147
Deferred interest		10,011			—			—
Reserve for returns		2,938			2,958			3,072
Inventory		4,303			3,730			6,390
CTA investment in foreign subsidiaries		4,525			3,361			2,987
Operating lease liabilities		8,112			8,677			9,677
Other		1,980			2,402			2,668
Net operating loss carryforward		11,057			5,211			3,093
Total deferred tax assets		61,171			53,656			52,467
Less valuation allowance		(11,207	)		(6,009	)		(3,896	)
Net deferred tax assets	$	49,964		$	47,647		$	48,571
Deferred tax liabilities
Intangible assets	$	61,715		$	62,295		$	62,372
LIFO reserve		21,263			18,118			15,191
Property and equipment		4,461			4,396			8,660
Operating lease right-of-use assets		6,670			7,089			7,882
Catalog advertising		1,808			1,940			1,812
Total deferred tax liabilities		95,917			93,838			95,917
Net deferred tax liability	$	45,953		$	46,191		$	47,346

As of January 27, 2023, the Company had $37.2 million of state net operating loss (“NOL”) carryforwards (generating a $1.8 million deferred tax asset) available to offset future taxable income. The state NOL carryforwards generally expire between 2024 and 2042 with certain state NOLs generated after 2017 having indefinite carryforward. The Company’s foreign subsidiaries had $31.8 million of NOL carryforwards (generating a $9.3 million deferred tax asset) available to offset future taxable income. These foreign NOLs can be carried forward indefinitely, however, a valuation allowance was established since the future utilization of these NOLs is uncertain.

A reconciliation of the beginning and ending gross amount of unrecognized tax benefits (“UTBs”) is as follows:

	Fiscal 2022			Fiscal 2021			Fiscal 2020
Gross UTBs balance at beginning of period	$	1,477		$	1,012		$	1,202
Tax positions related to the prior periods - gross    (decreases) increases		(180	)		539			(190	)
Settlements		—			(74	)		—
Gross UTBs balance at end of period	$	1,297		$	1,477		$	1,012

As of January 27, 2023, the Company had gross UTBs of $1.3 million. Of this amount, $1.2 million would, if recognized, impact its effective tax rate. The Company does not expect that UTBs will fluctuate significantly in the next 12 months for tax audit settlements and the expiration of the statute of limitations for certain jurisdictions. Tax years 2018 through 2022 remain open for examination by the Internal Revenue Service as well as various state and foreign jurisdictions.

The Company classifies interest expense and penalties related to UTBs and interest income on tax overpayments as components of income tax expense. As of January 27, 2023, the total amount of interest expense and penalties recognized on the balance sheet was $0.6 million ($0.5 million net of federal benefit). As of January 28, 2022, the total amount of accrued interest and penalties recognized on the balance sheet was $0.6 million ($0.5 million net of

federal benefit). The total amount of net interest expense recognized in the Consolidated Statements of Operations was insignificant for all periods presented. The Company files income tax returns in both the United States and various foreign jurisdictions.

Impacts of the CARES Act

In response to the COVID pandemic, the CARES Act was signed into law on March 27, 2020. The CARES Act, among other things, includes provisions related to refundable payroll tax credits, deferment of employer side social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. In Fiscal 2020, the Company recorded a $3.1 million benefit related to the technical corrections aspect of the CARES Act related to carryback of net operating losses in years beginning in 2017.