5.Income Tax Provision

 

The provision (benefit) for income taxes consists of the following (in thousands):

 

 

Differences between the provision (benefit) for income taxes and income taxes at the statutory federal income tax rate are as follows (in thousands):

 

 

The difference between the statutory rate of 35% and the effective tax rate for fiscal 2017 was driven primarily by the impact of recording additional valuation allowance against deferred tax assets due to additional losses sustained in fiscal 2017 as discussed below.

 

The difference between the statutory rate of 35% and the effective tax rate for fiscal 2016 was driven primarily due to the tax effect of the non-deductible goodwill impairment charge and the establishment of a valuation allowance against deferred tax assets as discussed below.

 

The difference between the statutory rate of 35% and the effective tax rate for fiscal 2015 was driven primarily by the impact of state income taxes and the non-deductibility of certain costs.

 

The components of deferred tax assets and liabilities were as follows (in thousands):

 

 

The Company assesses its ability to realize deferred tax assets throughout the fiscal year.  As a result of this assessment during the second quarter of fiscal 2016, the Company concluded that it was more likely than not that the Company would not realize its deferred tax assets. In the quarters prior to the recording of a valuation allowance in the second quarter of fiscal 2016, the Company weighed all available positive and negative evidence and determined that it was more likely than not that the deferred tax assets were fully realizable.  In fiscal 2016, the Company’s management had begun to take meaningful steps to focus on the operational execution of the initiatives launched in fiscal 2015, which were expected to drive performance improvements over the second and third quarters of fiscal 2016.  However, in the second quarter of fiscal 2016, the Company’s experienced (i) margin declines due to short-term sales promotions, (ii) delays in sales growth due to cannibalization from new store openings, (iii) increased inventory shrinkage from a buildup of inventory levels, and (iv) increases in support costs as a percentage of sales.  As a result of these second quarter of fiscal 2016 events, the Company decided to adjust merchandise pricing strategies, delay the pace of future store openings for the remainder of fiscal 2016, revise inventory shrinkage processes and establish selling, general and administrative cost control measures.  The Company concluded that until the performance issues identified in the second quarter of fiscal 2016 showed improvement, it was more likely than not that the Company would not realize its net deferred tax assets, and therefore the Company recorded a $31.7 million increase to provision for income taxes in order to establish a valuation allowance against such net deferred tax assets.

 

As of January 29, 2016, the valuation allowance increased to $88.3 million, which was primarily related to an increase in losses incurred during fiscal 2016. As of January 27, 2017, the valuation allowance increased to $137.7 million, which was primarily related to an increase in losses incurred during fiscal 2017.

 

The Company will continue to evaluate all of the positive and negative evidence in future periods and will make a determination as to whether it is more likely than not that all or a portion of its deferred tax assets will be realized in such future periods. At such time as the Company determines that it is more likely than not that all or a portion of its deferred tax assets are realizable, the valuation allowance will be reduced or released in its entirety, and the corresponding benefit will be reflected in the Company’s tax provision. Deferred tax liabilities associated with indefinite-lived intangibles cannot be considered a source of taxable income to support the realization of deferred tax assets because these deferred tax liabilities will not reverse until some indefinite future period when these assets are either sold or impaired for book purposes.  The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude the Company from using its loss carryforwards or utilizing other deferred tax assets in the future.

 

As of January 27, 2017, the Company had federal and state net operating loss (“NOL”), which will expire between fiscal 2019 and fiscal 2037.  The Company’s credit carryforwards will expire between fiscal 2025 and fiscal 2037.  As of January 27, 2017 and January 29, 2016, the Company had not accrued any liabilities related to unrecognized tax benefits, and had also not accrued any interest and penalties related to uncertain tax positions for the relevant periods. The Company files income tax returns in the U.S. federal jurisdiction and in various states.  The Company is subject to examinations by the major tax jurisdictions in which it files for the tax years 2011 forward.