Note 18 - Income Taxes

12 Months Ended

Feb. 01, 2025

Notes to Financial Statements

Income Tax Disclosure [Text Block]

18. Income Taxes

The domestic and international components of pre-tax income (loss) are as follows:

($ in millions)	2024			2023			2022
Domestic	$	100		$	(381	)	$	440
International		(49	)		(42	)		84
Total pre-tax income (loss)	$	51		$	(423	)	$	524

Domestic pre-tax income (loss) includes the results of non-U.S. businesses that are operated in branches owned directly by the U.S. which, therefore, are subject to U.S. income tax.

The income tax provision consists of the following:

($ in millions)	2024			2023			2022
Current:
Federal	$	21		$	8		$	64
State and local		13			2			27
International		27			33			68
Total current tax provision		61			43			159
Deferred:
Federal		12			(88	)		23
State and local		(1	)		(24	)		4
International		(39	)		(24	)		(6	)
Total deferred tax provision		(28	)		(136	)		21
Total income tax provision	$	33		$	(93	)	$	180

Following the enactment of Public Law 115-97 ("Tax Act") and the one-time transition tax, our historical foreign earnings are not subject to additional U.S. federal tax upon repatriation. Further, no additional U.S. federal tax will be due upon repatriation of current foreign earnings because they are either exempt or subject to U.S. tax as earned.

At February 1, 2025, we had accumulated undistributed foreign earnings of $400 million. This amount consists of historical earnings that were previously taxed under the Tax Act and post-Tax Act earnings. Investments in our foreign subsidiaries, including working capital, will continue to be permanently reinvested. Cash balances in excess of working capital needs are considered to be available for repatriation to the United States and foreign withholding taxes will be accrued as necessary on these amounts.

We have not recorded a deferred tax liability for the difference between the financial statement carrying amount and the tax basis of our investments in foreign subsidiaries. The determination of any unrecorded deferred tax liability on this amount is not practicable due to the uncertainty of how these investments would be recovered.

A reconciliation of the significant differences between the federal statutory income tax rate and the effective income tax rate on pre-tax income (loss) is as follows:

	2024			2023			2022
Federal statutory income tax rate		21.0	%		21.0	%		21.0	%
Increase in valuation allowance		36.0			(0.6	)		2.6
State and local income taxes, net of federal tax benefit		15.2			5.4			5.0
International income taxed at varying rates		(11.6	)		(4.4	)		8.4
Foreign tax credits		0.6			1.4			(3.6	)
Domestic/foreign tax settlements		—			1.0			(0.5	)
Federal tax credits		(4.4	)		0.5			(0.4	)
Foreign deferred adjustment		—			(2.0	)		—
Compensation based adjustments		7.6			(0.3	)		1.2
Other, net		0.2			—			0.6
Effective income tax rate		64.6	%		22.0	%		34.3	%

Deferred income taxes are provided for the effects of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. Items that give rise to significant portions of our deferred tax assets are as follows:

	February 1,			February 3,
($ in millions)	2025			2024
Deferred tax assets:
Tax loss/credit carryforwards and capital loss	$	208		$	166
Employee benefits		26			32
Operating leases - liabilities		627			668
Other		66			62
Total deferred tax assets	$	927		$	928
Valuation allowance		(112	)		(95	)
Total deferred tax assets, net	$	815		$	833

Items that give rise to significant portions of our deferred tax liabilities are as follows:

	February 1,			February 3,
($ in millions)	2025			2024
Deferred tax liabilities:
Merchandise inventories	$	101		$	97
Operating leases - assets		578			611
Goodwill and other intangible assets		111			118
Property and equipment		20			24
Other		11			9
Total deferred tax liabilities	$	821		$	859
Net deferred tax liability	$	(6	)	$	(26	)
Balance Sheet caption reported in:
Deferred taxes	$	143		$	114
Other liabilities		(149	)		(140	)
	$	(6	)	$	(26	)

Based upon the level of historical taxable income and projections for future taxable income, which are based upon our long-range strategic plans, management believes it is more likely than not that we will realize the benefits of deductible differences, net of the valuation allowances, over the periods in which the temporary differences are anticipated to reverse. At  February 1, 2025, our net deferred tax assets include $85 million of net operating loss ("NOL") carryforwards and $13 million of deferred interest deductions in the Netherlands that can be used to offset taxable income in future periods. After weighing the positive and negative evidence and considering both recent losses and forecasted taxable income, we consider it more likely than not that we will have sufficient source of taxable income in the future that will allow us to realize these deferred tax assets. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised. 

As of February 1, 2025, we have a valuation allowance of $112 million to reduce our deferred tax assets to an amount that is more likely than not to be realized. A valuation allowance of $75 million was recorded against tax loss carryforwards of certain foreign entities. Based on the history of losses and the absence of prudent and feasible business plans for generating future taxable income in these entities, we believe it is more likely than not that the benefit of these loss carryforwards will not be realized. As of February 1, 2025, a valuation allowance of $23 million was established for foreign taxes assessed at rates in excess of the U.S. federal tax rate for which no U.S. foreign tax credit is available. Additionally, since we do not have any reasonably foreseeable sources of capital gains in the U.S. or Canada, a valuation allowance of $11 million was established to offset deferred tax assets on capital losses. We also have a valuation allowance of $3 million related to losses from a legal entity restructuring.

At February 1, 2025, we have international minimum tax credit carryforwards with a potential tax benefit of $3 million and operating loss carryforwards with a potential tax benefit of $160 million, a portion of which will expire between 2025 and 2039 and a portion of which will never expire. The international operating loss carryforwards include unrecognized tax benefits. The Canadian capital loss of $1 million will carry forward indefinitely and the U.S. capital losses of $20 million can be carried back 3 years and forward for 5 years after realization. We also have U.S. state operating loss carryforwards with a potential benefit of $1 million that will expire between 2028 and 2043, and we have foreign tax credit carryforwards with a potential tax benefit of $23 million that will expire between 2029 and 2033.

We operate in multiple taxing jurisdictions and are subject to audit. Audits can involve complex issues that may require an extended period of time to resolve. A taxing authority may challenge positions that we have adopted in our income tax filings. Accordingly, we may apply different tax treatments for transactions in filing the income tax returns than for income tax financial reporting. We regularly assess our tax positions for such transactions and record reserves for those differences. We participate in the IRS's Compliance Assurance Process and the examination of our 2023 U.S. Federal income tax filing was concluded in February 2025. To date, no adjustments have been proposed in any audits that will have a material effect on our financial position or results of operations.

At February 1, 2025, we had $39 million of gross unrecognized tax benefits, of which $37 million would, if recognized, affect our annual effective tax rate. We classified certain income tax liabilities as current or noncurrent based on management's estimate of when these liabilities will be settled. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. Interest recorded in 2024 was not significant. We recorded interest income of $2 million in 2023 and recorded interest expense of $6 million in 2022.

The following table summarizes the activity related to unrecognized tax benefits:

($ in millions)	2024			2023			2022
Unrecognized tax benefits at beginning of year	$	50		$	52		$	41
Foreign currency translation adjustments		(1	)		—			(1	)
Increases related to current year tax positions		1			5			9
Increases related to prior period tax positions		2			2			7
Decreases related to prior period tax positions		(8	)		—			—
Settlements		—			(5	)		—
Lapse of statute of limitations		(5	)		(4	)		(4	)
Unrecognized tax benefits at end of year	$	39		$	50		$	52

It is reasonably possible that the liability associated with our unrecognized tax benefits will increase or decrease within the next twelve months. These changes may be the result of foreign currency fluctuations, ongoing audits, or the expiration of statutes of limitations. Settlements during 2025 are not expected to be significant based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although management believes that adequate provision has been made for such issues, the ultimate resolution could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, generating a positive effect on earnings.