Income Taxes

12 Months Ended

Feb. 01, 2020

INCOME TAXES:

The income tax provision consisted of the following:



	Fiscal 2019			Fiscal 2018			Fiscal 2017

	(in thousands)
Current:
Federal	$	4,593		$	5,903		$	39,376
State	(261		)	3,378			4,877
Foreign	315			282			266
Total	4,647			9,563			44,519
Deferred:
Federal	(4,392		)	(1,949		)	(3,669		)
State	545			86			1,750
Total	(3,847		)	(1,863		)	(1,919		)
Income tax provision	$	800		$	7,700		$	42,600

The foreign component of pre-tax income (loss), arising principally from operating foreign stores and other management and cost sharing charges we are required to allocate under U.S. tax law, for fiscal 2019, 2018 and 2017 was $(1.6) million, $(1.7) million and $0.1 million, respectively.

On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective January 1, 2018. As a result, the Company’s fiscal 2019 and 2018 federal tax rate was 21% and blended federal tax rate for fiscal 2017 was 33.8%.

As a result of the Tax Act and in accordance with SEC Staff Accounting Bulletin 118, the Company recorded provisional tax expense in the fourth quarter of fiscal 2017 related to executive compensation and other deferred tax balances. During fiscal 2018, the Company made a $4.9 million reduction, or 11.2% benefit to the effective tax rate, to the provisional tax expense related to the acceleration of certain tax deductions into fiscal 2017 and the subsequent revaluation of the associated deferred tax liabilities to reflect the new rate. The change was a result of additional analysis, changes in interpretation and assumptions, as well as additional regulatory guidance that was issued.

The Tax Act requires a one-time transition tax that is based on total post-1986 earnings and profits (“E & P”) previously deferred from U.S. income taxes. As the Company does not have any post-1986 E & P in its foreign subsidiaries, no one-time transition tax was recorded.

No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the one-time transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. There were no significant undistributed foreign earnings at February 1, 2020, February 2, 2019 and February 3, 2018.

The Company completed its accounting for the income tax effects of the Tax Act in December 2018.

A reconciliation between the statutory federal income tax rate and the effective income tax rate follows:



	Fiscal 2019⁽¹⁾		Fiscal 2018		Fiscal 2017
Federal income tax rate (blended rate for fiscal 2017 due to the Tax Act)	21.0	%	21.0	%	33.8	%
State income tax, net of federal tax benefit	(1.4	)	5.7		3.2
Impact of the Tax Act	—		(11.2	)	(5.6	)
Excess share-based compensation	(19.3	)	3.2		0.9
Provision-to-tax return adjustments	(8.9	)	—		(0.6	)
Valuation allowance on charitable carryover expirations	(4.9	)	—		—
Enhanced charitable contribution	—		(3.0	)	(1.1	)
Executive compensation limitations	(3.8	)	2.1		0.7
Foreign losses with full valuation allowance	(3.8	)	1.1		0.1
Federal tax credits	6.0		(1.1	)	(1.2	)
Changes in uncertain tax positions	4.2		(0.1	)	(0.5	)
Other items, net	4.2		0.1		—
Total	(6.7	)%	17.8	%	29.7	%

⁽¹⁾Given the low level of pre-tax income in absolute dollars in fiscal 2019, effective tax rate reconciling items that may have been considered de minimis in prior years in terms of absolute dollars and on a percentage basis are amplified on a percentage basis in the current year even though the absolute dollar value of the reconciling items are similar to prior year. As such, comparability of information disclosed for fiscal 2019 in comparison to fiscal 2018 and fiscal 2017 may be difficult as a result of the amplifying effect of the lower level of pre-tax income.

Deferred tax assets and liabilities are recorded due to different carrying amounts for financial and income tax reporting purposes arising from cumulative temporary differences. These differences consist of the following as of February 1, 2020 and February 2, 2019:



	February 1, 2020			February 2, 2019

	(in thousands)
Deferred tax assets:
Operating lease liabilities	$	192,392		$	—
Accrued liabilities and allowances	15,335			10,984
Accrued straight-line rent	—			12,302
Share-based compensation	3,557			5,936
Property related	379			1,881
Charitable contribution limitation carryforwards	1,400			4,400
Tax credits and net operating loss carryforwards	6,227			5,337
Other	1,909			2,681
Total deferred tax assets	221,199			43,521
Valuation allowance	(2,162		)	(1,111		)
Net deferred tax assets	219,037			42,410

Deferred tax liabilities:
Operating lease assets	(169,900		)	—
Inventories	(2,785		)	—
Prepaid and other expenses	(1,603		)	(1,760		)
Property related	(26,628		)	(26,733		)
Other intangible assets	(17,827		)	(17,416		)
Total deferred tax liabilities	(218,743		)	(45,909		)
Net deferred taxes	$	294		$	(3,499	)

As of February 1, 2020, the Company had deferred tax assets for state and local net operating losses and tax credit carryovers in the amounts of $18.0 million and $5.1 million, respectively, on a gross basis that could be utilized to reduce future years' tax liabilities. The net operating losses and tax credit carryovers expire, if unused, in the years 2020 - 2039 and 2020 - 2028, respectively. As of February 1, 2020, the Company had deferred tax assets related to foreign net operating loss carryforwards in the amount of $5.4 million on a gross basis. The foreign carryforwards will begin to expire, if unused, in 2022. Some foreign net operating losses have an indefinite carryforward.

The Company believes it is more likely than not that the net operating losses and credit carryforwards will reduce future years’ tax liabilities in various states. The Company has recorded valuation allowances against all foreign net operating loss carryforwards as the Company does not believe it is more likely than not that the foreign net operating losses will be utilized. Valuation allowances have also been provided on certain deferred tax assets for charitable contributions with limitations and other foreign deferred tax assets. No other valuation allowances have been provided for deferred tax assets because management believes that it is more likely than not that the full amount of the net deferred tax assets will be realized in the future. While the Company does not expect material adjustments to the total amount of valuation allowances within the next twelve months, changes in assumptions may occur based on the information then currently available. In such case, the Company will record an adjustment in the period in which a determination is made.

Accumulated other comprehensive loss is shown net of deferred tax assets and deferred tax liabilities. The amount was not significant at February 1, 2020 or February 2, 2019.

A reconciliation of the beginning and ending amounts of uncertain tax positions for each of fiscal 2019, fiscal 2018 and fiscal 2017 is as follows:



	Fiscal 2019			Fiscal 2018			Fiscal 2017

	(in thousands)
Balance at beginning of year	$	1,505		$	1,522		$	5,158
Additions for tax positions of prior years	82			117			—
Reductions for tax positions of prior years	(45		)	(24		)	(105		)
(Reductions) additions for tax positions for the current year	—			87			289
Settlements/payments with tax authorities	(538		)	(197		)	(3,667		)
Reductions due to lapse of applicable statutes of limitation	(257		)	—			(153		)
Balance at end of year	$	747		$	1,505		$	1,522

At February 1, 2020, February 2, 2019 and February 3, 2018, balances included $0.6 million, $1.2 million and $1.2 million respectively, of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate in future periods. We do not expect any events to occur that would cause a change to our unrecognized tax benefits or income tax expense within the next twelve months.

Our continuing practice is to recognize potential accrued interest and penalties relating to unrecognized tax benefits in the income tax provision. We accrued $0.1 million for interest and penalties for each of the fiscal years 2019, 2018 and 2017. We had approximately $0.1 million, $0.3 million and $0.3 million, respectively, for the payment of interest and penalties accrued at February 1, 2020, February 2, 2019 and February 3, 2018, respectively. The amounts included in the reconciliation of uncertain tax positions do not include accruals for interest and penalties.

In fiscal 2006, we began participating in the IRS’s real time audit program, Compliance Assurance Process (“CAP”). Under the CAP program, material tax issues and initiatives are disclosed to the IRS throughout the year with the objective of reaching an agreement as to the proper reporting treatment when the federal return is filed. Previous years through fiscal 2017 have been accepted. Fiscal 2018 is in the post-filing review process.

We are no longer subject to state and local examinations for years before fiscal 2011. Various state and foreign examinations are currently underway for fiscal periods spanning from 2013 through 2018; however, we do not expect any significant change to our uncertain tax positions within the next year.