Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation under the Tax Cuts and Jobs Act (the “Tax Act”). Among other things, the Tax Act reduces the corporate income tax rate from 35% to 21%, provides for a deemed repatriation of undistributed foreign earnings by U.S. taxpayers at reduced tax rates (the “Transition Tax”), makes other fundamental changes to how future foreign earnings will be taxed by the U.S., and otherwise modifies corporate tax rules in significant ways. In accordance with U.S. GAAP, the Company applied a blended federal income tax rate to fiscal 2017 results based upon a pro-rated percentage of the number of days before and after January 1, 2018.
In response to the Tax Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on the application of U.S. GAAP and the accounting for the income tax effects of the Tax Act. SAB 118 provides a measurement period time frame that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, "Income Taxes". As a result of the Tax Act, the Company recorded a provisional income tax charge of $6.0 million related to the deemed repatriation of accumulated but undistributed earnings of foreign operations. The re-measurement of the Company’s net deferred tax liability resulted in a provisional income tax benefit of $5.3 million. The estimated repatriation was recorded based on the Company's initial evaluation of the impact of the Tax Act and is subject to change during fiscal 2018 as the Company continues to refine, analyze and update the underlying data, computations and assumptions used to prepare this provisional amount during the measurement period. The Company believes its re-measurement of the deferred tax assets and liabilities is complete, except for changes in estimates that can result from finalizing the filing of our 2017 U.S. income tax return and changes that may be a direct impact of other provisional amounts recorded due to the enactment of the Tax Act. The Company will refine its estimates to incorporate new or revised information as it becomes available during the preparation of the 2017 U.S. income tax return. Additionally, the Company continues to evaluate the Global Intangible Low Tax Income ("GILTI") provisions of the Tax Act and the impact, if any, on our Consolidated Financial Statements. As a result, we have not included any amount related to GILTI in our Consolidated Financial Statements for the fiscal year ended February 3, 2018.
The tax owed on the Company’s estimated deemed repatriation resulting from the Tax Act is payable in uneven annual installments through 2025. As such, $5.5 million of the tax on undistributed foreign earnings not payable within the next 12 months is presented within long-term deferred revenue and other liabilities on the Consolidated Balance Sheet.
The components of the provision for income taxes are as follows for the fiscal periods ended (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current: |
| | | | |
Federal | $ | 114,443 |
| | $ | 184,636 |
| | $ | 164,165 |
|
State | 20,996 |
| | 31,426 |
| | 27,076 |
|
| 135,439 |
| | 216,062 |
| | 191,241 |
|
Deferred: |
| | | | |
Federal | 38,805 |
| | (38,138 | ) | | 8,198 |
|
State | 3,648 |
| | (6,898 | ) | | 1,045 |
|
| 42,453 |
| | (45,036 | ) | | 9,243 |
|
Total provision | $ | 177,892 |
| | $ | 171,026 |
| | $ | 200,484 |
|
| | | | | |
The provision for income taxes differs from the amounts computed by applying the federal statutory rate as follows for the following periods:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 33.7 | % | | 35.0 | % | | 35.0 | % |
State tax, net of federal benefit | 3.3 | % | | 3.3 | % | | 3.5 | % |
Valuation allowance | (0.8 | )% | | (0.1 | )% | | (0.1 | )% |
Other permanent items | (0.7 | )% | | (0.9 | )% | | (0.6 | )% |
Effective income tax rate | 35.5 | % | | 37.3 | % | | 37.8 | % |
| | | | | |
Components of deferred tax assets (liabilities) consist of the following as of the fiscal periods ended (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Inventory | $ | 35,613 |
| | $ | 69,784 |
|
Employee benefits | 32,909 |
| | 42,730 |
|
Deferred rent | 29,710 |
| | 41,684 |
|
Stock-based compensation | 18,315 |
| | 26,697 |
|
Gift cards | 13,006 |
| | 19,077 |
|
Deferred revenue currently taxable | 7,801 |
| | 12,485 |
|
Store closing expense | 2,739 |
| | 6,852 |
|
Other accrued expenses not currently deductible for tax purposes | 4,590 |
| | 6,577 |
|
Net operating loss carryforward | 3,031 |
| | 5,901 |
|
Non income-based tax reserves | 5,518 |
| | 5,319 |
|
Capital loss carryforward | 910 |
| | 4,717 |
|
Uncertain income tax positions | 2,152 |
| | 3,597 |
|
Insurance | 2,060 |
| | 2,674 |
|
Other | 78 |
| | 139 |
|
Valuation allowance | — |
| | (4,717 | ) |
Total deferred tax assets | 158,432 |
| | 243,516 |
|
Property and equipment | (117,925 | ) | | (146,925 | ) |
Inventory valuation | (28,430 | ) | | (42,354 | ) |
Intangibles | (4,844 | ) | | (8,310 | ) |
Prepaid expenses | (3,826 | ) | | — |
|
Total deferred tax liabilities | (155,025 | ) | | (197,589 | ) |
Net deferred tax asset | $ | 3,407 |
| | $ | 45,927 |
|
| | | |
The deferred tax asset from net operating loss carryforwards of $3.0 million represents approximately $10.5 million of federal net operating losses which expire in 2036 and $13.3 million of state net operating losses which expire in 2034. In 2017, of the $3.4 million net deferred tax asset, $13.6 million is included within other long-term assets and $10.2 million is included within other long-term liabilities on the Consolidated Balance Sheet. In 2016, the $45.9 million net deferred tax asset was included in its entirety within other long-term assets on the Consolidated Balance Sheet.
The Company does not provide for deferred taxes on the excess of the financial reporting basis over the tax basis related to our investments in foreign subsidiaries. It is the Company’s intention to permanently reinvest the earnings from foreign subsidiaries outside the United States. Under the Tax Act, the Transition Tax resulted in the elimination of the excess of the amount of financial reporting basis over the tax basis in the foreign subsidiaries and subjected $63.4 million of undistributed foreign earnings to tax. An actual repatriation from our international subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes. We do not anticipate the need to repatriate funds to the United States to satisfy domestic liquidity needs and accordingly do not provide for foreign withholding taxes and U.S. state taxes.
As of February 3, 2018, the total liability for uncertain tax positions, including related interest and penalties, was approximately $10.5 million.
The following table represents a reconciliation of the Company's total balance of unrecognized tax benefits, excluding interest and penalties (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Beginning of fiscal year | $ | 8,293 |
| | $ | 9,784 |
| | $ | 8,376 |
|
Increases as a result of tax positions taken in a prior period | 124 |
| | — |
| | 1,101 |
|
Decreases as a result of tax positions taken in a prior period | (142 | ) | | (831 | ) | | — |
|
Increases as a result of tax positions taken in the current period | — |
| | 2,067 |
| | 1,193 |
|
Decreases as a result of settlements during the current period | (228 | ) | | (2,534 | ) | | (63 | ) |
Reductions as a result of a lapse of statute of limitations during the current period | — |
| | (193 | ) | | (823 | ) |
End of fiscal year | $ | 8,047 |
| | $ | 8,293 |
| | $ | 9,784 |
|
| | | | | |
The balance at February 3, 2018 includes $6.4 million of unrecognized tax benefits that would impact our effective tax rate if recognized. The Company recognizes accrued interest and penalties from unrecognized tax benefits in income tax expense.
As of February 3, 2018, the liability for uncertain tax positions includes $2.5 million for the accrual of interest and penalties. During fiscal 2017, 2016 and 2015, the Company recorded $0.4 million, $0.3 million and $1.2 million, respectively, for the accrual of interest and penalties in the Consolidated Statements of Income. The Company has ongoing federal, state and local examinations. It is possible that these examinations may be resolved within 12 months. Due to the potential for resolution of these examinations, and the expiration of various statutes of limitation, it is reasonably possible that $4.0 million of the Company's gross unrecognized tax benefits and interest at February 3, 2018 could be recognized within the next 12 months. The Company does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Consolidated Statements of Income during fiscal 2018.
The Company participates in the Internal Revenue Service ("IRS") Compliance Assurance Program ("CAP"). As part of the CAP, tax years are audited on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. The IRS has completed examinations of 2016 and all prior tax years. The Company is no longer subject to examination in any of its major state jurisdictions for years prior to 2013.