Income taxes

6 Months Ended

Aug. 03, 2012

Income taxes

Income taxes

4.Income taxes

Under the accounting standards for income taxes, the asset and liability method is used for computing the future income tax consequences of events that have been recognized in the Company’s consolidated financial statements or income tax returns.

Income tax reserves are determined using the methodology established by accounting standards for income taxes which require companies to assess each income tax position taken using a two-step approach. A determination is first made as to whether it is more likely than not that the position will be sustained, based upon the technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position.

The Internal Revenue Service (“IRS”) has completed its examination of the Company’s federal income tax returns for fiscal years 2006, 2007, and 2008. As a result, the 2008 and earlier years are not open for examination by the IRS.  The IRS has not indicated whether they intend to examine the Company’s 2009, 2010, or 2011 fiscal year income tax filings. The Company has various state income tax examinations that are currently in progress. Generally, the Company’s 2009 and later tax years remain open for examination by the various state taxing authorities.

As of August 3, 2012, the total reserves for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $21.3 million, $1.8 million and $0.4 million, respectively, for a total of $23.5 million. Of this amount, $0.3 million and $22.9 million are reflected in current liabilities as Accrued expenses and other and in noncurrent Other liabilities, respectively, in the condensed consolidated balance sheet with the remaining $0.3 million reducing deferred tax assets related to net operating loss carry forwards. The reserve for uncertain tax benefits decreased during the 26-week period ended August 3, 2012 by $20.7 million due principally to the favorable resolution of matters associated with examination activity.

The Company believes it is reasonably possible that the reserve for uncertain tax positions may be reduced by approximately $1.0 million in the coming twelve months. As of August 3, 2012, approximately $21.3 million of the reserve for uncertain tax positions would impact the Company’s effective income tax rate if the Company were to recognize the tax benefit for these positions.

The effective income tax rates for the 13-week and 26-week periods ended August 3, 2012 were 34.1% and 36.2%, compared to rates of 36.8% and 37.5% for the respective 13-week and 26-week periods ended July 29, 2011. Increases in the effective tax rate associated with the expiration of various federal jobs credits for workers hired after December 31, 2011 (primarily the Work Opportunity Tax Credit) as well as the expiration of the Hire Act’s Retention Credit were more than offset by decreases associated with the adjustment of accruals due to the favorable resolution of income tax examinations.