5.	Income Taxes

At August 3, 2013, the Company had net deferred tax assets of approximately $49.0 million, with a corresponding valuation allowance of $3.5 million. The deferred tax assets include approximately $31.3 million of net operating loss carryforwards and approximately $7.2 million of deferred gain on sale-leaseback and, to a lesser extent, other book/tax timing differences. As of August 3, 2013, the Company had gross net operating loss carryforwards of $85.6 million for federal income tax purposes and $47.0 million for state income tax purposes that are available to offset future taxable income through fiscal year 2033. Included in the net operating loss carryforwards for both federal and state income tax is approximately $13.0 million relating to stock compensation deductions, the tax benefit from which, if realized, will be credited to additional paid-in capital.

On a continuing income basis, the Company’s effective tax rate for the first six months of fiscal 2013 was 26.1% as compared to 40.4% for the first six months of fiscal 2012 and is consistent with the statutory tax rate applicable to the U.S. and the blended state rate for the states in which the Company conducts business. The effective tax rate for the first six months of fiscal 2013 is lower than the prior year due to the impact of discrete and permanent items that reduced the income tax benefit recognized on the Company’s pre-tax loss for fiscal 2013.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. The charge is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Pursuant to Topic 740, Income Taxes , the Company will recognize the benefit from a tax position only if it is more likely than not that the position would be sustained upon audit based solely on the technical merits of the tax position. At August 3, 2013, the Company had no material unrecognized tax benefits.

The Company is subject to U.S. federal income tax as well as income tax of multiple state and certain foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for years through fiscal 1997, with remaining fiscal years subject to income tax examination by federal tax authorities.

The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits in its income tax provision. The Company has not accrued or paid interest or penalties which were material to its results of operations for the first six months of fiscal 2013.