INCOME TAXES

9 Months Ended

Nov. 02, 2024

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The Company computes income taxes using the asset and liability method. This method requires recognition of deferred tax assets and liabilities, measured by enacted rates, attributable to temporary differences between the financial statement and income tax basis of assets and liabilities. The Company’s deferred tax assets and liabilities are comprised largely of differences relating to depreciation and amortization, rent expense, inventory, stock-based compensation, net operating loss carryforwards, tax credits, and various accruals and reserves.

The Company’s provision (benefit) for income taxes in the Third Quarter 2024 has been calculated by applying an estimate of the annual effective tax rate for Fiscal 2024 to pre-tax income (loss), excluding unusual or infrequently occurring discrete items in the reporting period. This is the method that has historically been followed in interim reporting periods with the exception of the Third Quarter 2023, where the Company computed its provision (benefit) for income taxes based on the actual effective tax rate for Year-To-Date 2023 by applying the discrete method as allowed by Accounting Standards Codification (“ASC”) 740-270-30-18, “Income Taxes-Interim Reporting-Initial Measurement”. The Company’s effective income tax rate for the Third Quarter 2024 was a benefit of (4.7)%, or $(0.9) million, compared to (3.9)%, or $(1.5) million, during the Third Quarter 2023. The change in the effective income tax rate and income tax provision (benefit) for the Third Quarter 2024 compared to the Third Quarter 2023 was primarily driven by the establishment of a valuation allowance against the Company’s net deferred tax assets in Fiscal 2023, partially offset by a favorable shift in the jurisdictional earnings mix in Fiscal 2024. Furthermore, the Company’s provision (benefit) for income taxes in the Third Quarter 2024 has been calculated by applying an estimate of the annual effective tax rate. In the Third Quarter 2023, the Company computed its provision (benefit) for income taxes based on the actual effective tax rate for Year-To-Date 2023 by applying the discrete method.

The Company’s effective income tax rate for Year-To-Date 2024 was a provision of (4.8)%, or $2.3 million, compared to a benefit of 40.9%, or $(17.8) million, for Year-To-Date 2023. The change in the effective income tax rate and income tax provision (benefit) for Year-To-Date 2024 compared to Year-To-Date 2023 was primarily driven by the establishment of a valuation allowance against the Company’s net deferred tax assets in Fiscal 2023.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act allows net operating losses (“NOLs”) incurred in taxable years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to offset 100% of taxable income and to generate a refund of previously paid income taxes. Pursuant to the CARES Act, the Company carried back the taxable year 2020 tax loss of $150.0 million to prior years. As of November 2, 2024, the remaining income tax receivable of $19.1 million is included within Prepaid expenses and other current assets on the Consolidated Balance Sheets.

The Company accrues interest and penalties related to unrecognized tax benefits as part of its provision (benefit) for income taxes. The total amount of unrecognized tax benefits was $6.9 million, $7.0 million, and $4.8 million as of November 2, 2024, February 3, 2024, and October 28, 2023, respectively, and is included within long-term liabilities. Additional interest expense recognized in the Third Quarter 2024 and Third Quarter 2023 related to unrecognized tax benefits was not significant.

The Company is subject to tax in the United States and foreign jurisdictions, including Canada and Hong Kong. The Company files a consolidated U.S. income tax return for federal income tax purposes. The Company is no longer subject to income tax examinations by U.S. federal, state and local or foreign tax authorities for tax years 2015 and prior.

The Internal Revenue Service is currently conducting an examination of the Company’s tax return for fiscal year 2020 in conjunction with its review of the CARES Act NOL carryback to earlier fiscal years. The Company believes that its reserves for uncertain tax positions are adequate to cover existing risks or exposures. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues arise as a result of a tax audit, and are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

During the First Quarter 2024, Mithaq became the controlling shareholder of the Company. This change of control constituted an “ownership change” under the Internal Revenue Code Section 382, subjecting the Company to an annual limitation on its ability to utilize its existing NOLs and tax credits as of the ownership change date to offset future taxable income. The application of such limitation may cause U.S. federal income taxes to be paid by the Company earlier than they otherwise would be paid if such limitation was not in effect, which would adversely affect the Company’s operating results and cash flows if it has taxable income in the future. In addition to the aforementioned federal income tax implications pursuant to Section 382 of the Code, most U.S. states follow the general provision of Section 382 of the Code, either explicitly or implicitly resulting in separate state NOL limitations. This could cause state income taxes to be paid earlier than otherwise would be paid if such limitation was not in effect and could cause such NOLs to expire unused.