Income Taxes

12 Months Ended

Feb. 03, 2024

Income Tax Disclosure [Abstract]

Income Taxes

NOTE 12: INCOME TAXES

U.S. and foreign components of earnings before income taxes were as follows:

Fiscal year	2023	2022	2021
U.S.	$143	$316	$241
Foreign	4	21	5
Earnings before income taxes	$147	$337	$246

Income tax expense consists of the following:

Fiscal year	2023	2022	2021
Current income taxes:
Federal	$55	$149	$61
State and local	18	27	18
Foreign	—	(1)	—
Total current income tax expense	73	175	79
Deferred income taxes:
Federal	(59)	(86)	(10)
State and local	(10)	(2)	(5)
Foreign	9	5	4
Total deferred income tax benefit	(60)	(83)	(11)
Total income tax expense	$13	$92	$68

A reconciliation of the statutory federal income tax rate to the effective tax rate on earnings before income taxes is as follows:

Fiscal year	2023		2022		2021
Statutory rate	21.0	%	21.0	%	21.0	%
CARES Act impact	—		—		(0.9	%)
State and local income taxes, net of federal income taxes	4.0	%	5.9	%	3.4	%
Federal credits	(4.7	%)	(3.8	%)	(4.0	%)
Non-deductible expenses	2.9	%	1.2	%	2.7	%
Stock-based compensation	5.1	%	1.8	%	2.0	%
Valuation allowance	6.6	%	0.4	%	1.8	%
Taxes on foreign operations	1.5	%	1.6	%	1.3	%
Excess tax over book loss on Canada wind-down	(18.2	%)	—		—
Resolution of prior period tax matters	(11.2	%)	—		—
Other, net	1.6	%	(0.9	%)	0.2	%
Effective tax rate	8.6	%	27.2	%	27.5	%

The components of deferred tax assets and liabilities are as follows:

	February 3, 2024	January 28, 2023
Deferred tax assets:
Lease liabilities	$425	$463
Compensation and benefits accruals	104	111
Sales return reserve	56	61
Accrued expenses	31	28
Merchandise inventories	36	33
Gift cards	39	43
The Nordy Club loyalty program	2	8
Net operating losses	38	52
Other	36	25
Total deferred tax assets	767	824
Valuation allowance	(1)	(28)
Total deferred tax assets, net of valuation allowance	766	796
Deferred tax liabilities:
ROU assets	(310)	(331)
Land, property and equipment	(164)	(230)
Debt exchange premium	(11)	(12)
Total deferred tax liabilities	(485)	(573)
Net deferred tax assets	$281	$223

The following sets forth information on approximate net operating loss carryforwards for income tax purposes:

	February 3, 2024	January 28, 2023
State	$621	$756
Foreign	—	26

The net operating loss carryforwards are subject to certain statutory limitations of applicable state laws. If not utilized, a portion of our state net operating loss carryforwards will begin to expire in 2024.

As of February 3, 2024 and January 28, 2023, the valuation allowance for deferred tax assets was $1 and $28. As a result of the wind-down of our Canada operations in 2023, the valuation allowance for foreign deferred tax assets increased $9 and upon deconsolidation was written off to zero. The write-off of the deferred tax assets and corresponding valuation allowance for Canada was included in the Canada wind-down costs. In 2023, a valuation allowance of $1 was recorded for state net operating loss carryforwards that will not be realized in the foreseeable future. There was no change to the valuation allowance in 2022.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Fiscal year	2023	2022	2021
Unrecognized tax benefit at beginning of year	$48	$47	$32
Gross increase to tax positions in prior periods	1	1	11
Gross decrease to tax positions in prior periods	(4)	(6)	—
Gross increase to tax positions in current period	6	7	6
Settlements	(27)	(1)	(2)
Unrecognized tax benefit at end of year	$24	$48	$47

At the end of 2023 and 2022, $22 and $45 of the ending gross unrecognized tax benefit related to items which, if recognized, would affect the effective tax rate.

There was no material expense for interest and penalties in 2023, 2022 and 2021. At the end of 2023 and 2022, our liability for interest and penalties was $3 and $8.

We file income tax returns in the U.S. With few exceptions, we are no longer subject to federal or state and local income tax examinations for years before 2014. As of February 3, 2024, we believe it is reasonably possible unrecognized tax benefits related to federal, state and local tax positions may decrease $6 by February 1, 2025, due to the completion of examinations and the expiration of various statutes of limitations.