15. Income Taxes
Income before income taxes was as follows for Fiscal 2017, Fiscal 2016 and Fiscal 2015:
|
|
|
(in thousands) |
|
|||||||||
|
|
|
Year Ended |
|
|||||||||
|
|
|
February 3, 2018 |
|
|
January 28, 2017 |
|
|
January 30, 2016 |
|
|||
|
Domestic |
|
$ |
429,939 |
|
|
$ |
330,106 |
|
|
$ |
241,112 |
|
|
Foreign |
|
|
(959 |
) |
|
|
3,106 |
|
|
|
(2,236 |
) |
|
Total income before income taxes |
|
$ |
428,980 |
|
|
$ |
333,212 |
|
|
$ |
238,876 |
|
Income tax expense was as follows for Fiscal 2017, Fiscal 2016 and Fiscal 2015:
|
|
|
(in thousands) |
|
|||||||||
|
|
|
Year Ended |
|
|||||||||
|
|
|
February 3, 2018 |
|
|
January 28, 2017 |
|
|
January 30, 2016 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
65,824 |
|
|
$ |
104,934 |
|
|
$ |
71,441 |
|
|
State |
|
|
8,824 |
|
|
|
14,957 |
|
|
|
11,044 |
|
|
Foreign |
|
|
207 |
|
|
|
367 |
|
|
|
— |
|
|
Subtotal |
|
|
74,855 |
|
|
|
120,258 |
|
|
|
82,485 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(40,839 |
) |
|
|
1,655 |
|
|
|
6,452 |
|
|
State |
|
|
9,091 |
|
|
|
3,399 |
|
|
|
(543 |
) |
|
Foreign |
|
|
1,021 |
|
|
|
(7,973 |
) |
|
|
— |
|
|
Subtotal |
|
|
(30,727 |
) |
|
|
(2,919 |
) |
|
|
5,909 |
|
|
Total Income Tax Expense |
|
$ |
44,128 |
|
|
$ |
117,339 |
|
|
$ |
88,394 |
|
The tax rate reconciliations were as follows for Fiscal 2017, Fiscal 2016 and Fiscal 2015:
|
|
|
Fiscal Year Ended |
|
|||||||||
|
|
|
February 3, 2018 |
|
|
January 28, 2017 |
|
|
January 30, 2016 |
|
|||
|
Tax at statutory rate |
|
|
33.7 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State income taxes, net of federal |
|
|
3.0 |
|
|
|
3.0 |
|
|
|
3.0 |
|
|
Excess tax benefit from stock compensation |
|
|
(4.4 |
) |
|
|
- |
|
|
|
- |
|
|
Tax credits |
|
|
(1.4 |
) |
|
|
(1.7 |
) |
|
|
(2.1 |
) |
|
Impact of federal tax reform |
|
|
(21.1 |
) |
|
|
- |
|
|
|
- |
|
|
Other |
|
|
0.5 |
|
|
|
(1.1 |
) |
|
|
1.1 |
|
|
Effective tax rate |
|
|
10.3 |
% |
|
|
35.2 |
% |
|
|
37.0 |
% |
The decrease in the effective tax rate was primarily the result of the impact of federal tax reform and the inclusion of excess tax benefits from stock compensation within the tax provision upon our adoption of ASU 2016-09 in the first quarter of 2017.
The 2017 U.S. Tax Cuts and Jobs Act of 2017 (Tax Act) was signed into law on December 22, 2017. The Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate income tax rate from 35% to 21%, eliminating or limiting certain deductions, and enhancing and extending through 2026 the option to claim accelerated depreciation on qualified property. The change reduced the Company’s effective tax rate by 21.1% for Fiscal 2017, primarily due to a one-time incremental benefit of approximately $93 million from remeasurement of net deferred tax positions to reflect the reduction in corporate tax rate from 35% to 21%. The provisional remeasurement amount may change as data becomes available allowing more accurate scheduling of the deferred tax assets and liabilities, primarily related to depreciable assets, inventory and occupancy costs.
Additionally on December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. As such, the Company is reporting the impacts of the Tax Act provisionally based upon reasonable estimates. The impacts are not yet finalized as they are dependent on factors and analysis not yet known or fully completed, including but not limited to, depreciation, additional effect of the rate change on the ending deferred balances and the issuance of additional guidance, as well as our ongoing analysis of the Tax Act.
Our Fiscal 2016 effective tax rate was lower than Fiscal 2015 primarily due to a one-time benefit recorded from release of valuation allowance on foreign deferred tax assets.
The tax effects of temporary differences are included in deferred tax accounts as follows:
|
|
|
(in thousands) |
|
|||||||||||||
|
|
|
February 3, 2018 |
|
|
January 28, 2017 |
|
||||||||||
|
|
|
Tax Assets |
|
|
Tax Liabilities |
|
|
Tax Assets |
|
|
Tax Liabilities |
|
||||
|
Non-current deferred tax assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment basis adjustments |
|
$ |
— |
|
|
$ |
132,793 |
|
|
$ |
— |
|
|
$ |
178,017 |
|
|
Deferred rent |
|
|
18,926 |
|
|
|
— |
|
|
|
36,529 |
|
|
|
— |
|
|
Intangibles—long-lived |
|
|
— |
|
|
|
48,397 |
|
|
|
— |
|
|
|
83,499 |
|
|
Intangibles—indefinite-lived |
|
|
— |
|
|
|
65,748 |
|
|
|
— |
|
|
|
94,624 |
|
|
Incidental supplies |
|
|
— |
|
|
|
10,207 |
|
|
|
— |
|
|
|
13,744 |
|
|
Employee benefit compensation |
|
|
13,071 |
|
|
|
— |
|
|
|
26,665 |
|
|
|
— |
|
|
State net operating losses (net of federal benefit) |
|
|
12,760 |
|
|
|
— |
|
|
|
9,096 |
|
|
|
— |
|
|
Inventory costs and reserves capitalized for tax purposes |
|
|
7,069 |
|
|
|
— |
|
|
|
11,869 |
|
|
|
— |
|
|
Landlord allowances |
|
|
30,057 |
|
|
|
— |
|
|
|
40,699 |
|
|
|
— |
|
|
Reserves |
|
|
7,407 |
|
|
|
— |
|
|
|
34,267 |
|
|
|
— |
|
|
Tax credits |
|
|
5,126 |
|
|
|
— |
|
|
|
4,480 |
|
|
|
— |
|
|
Other |
|
|
— |
|
|
|
1,429 |
|
|
|
13,705 |
|
|
|
— |
|
|
Valuation allowance |
|
|
(8,376 |
) |
|
|
— |
|
|
|
(7,388 |
) |
|
|
— |
|
|
Total non-current deferred tax assets and liabilities |
|
$ |
86,040 |
|
|
$ |
258,574 |
|
|
$ |
169,922 |
|
|
$ |
369,884 |
|
|
Net deferred tax liability |
|
|
|
|
|
$ |
172,534 |
|
|
|
|
|
|
$ |
199,962 |
|
The reduction in deferred tax liability is primarily driven by the remeasurement of deferred balances based on the reduction of the federal statutory corporate tax rate from 35% to 21% due to the Tax Act.
As of February 3, 2018, the Company has a deferred tax asset related to net operating losses of $12.8 million, inclusive of $10.8 million of state net operating losses which will expire at various dates between 2018 and 2037 and $2.0 million of deferred tax assets recorded for Puerto Rico net operating loss carry-forwards that will begin to expire in 2025. As of February 3, 2018, the Company had tax credit carry-forwards of $5.1 million, inclusive of state tax credit carry-forwards of $3.5 million that will begin to expire in 2022 and $1.6 million of Puerto Rico alternative minimum tax (AMT) credits that have an indefinite life.
As of January 28, 2017, the Company had a deferred tax asset related to net operating losses of $9.1 million, inclusive of $7.0 million of state net operating losses and $2.1 million of deferred tax assets recorded for Puerto Rico net operating loss carry-forwards. As of January 28, 2017, the Company had tax credit carry-forwards of $4.5 million, inclusive of state tax credit carry-forwards of $3.2 million and $1.3 million of Puerto Rico alternative minimum tax (AMT) credits.
We believe that it is more likely than not that the benefit from certain state net operating loss carry forwards and credits will not be realized. In recognition of this risk, we have provided a total valuation allowance of $8.4 million inclusive of $6.0 million of valuation allowance related to state net operating losses and $2.4 million related to tax credit carry-forwards, for the fiscal year ended February 3, 2018. If our assumptions change and we determine we will be able to realize these net operating losses or the credits, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets as of February 3, 2018 will be recorded to the Company’s Consolidated Statement of Income. The total valuation allowance increased by $1.0 million from the prior year which was primarily due to the decrease in federal benefit of state tax expense driven by the Tax Act. For the fiscal year ended January 28, 2017, we provided a total valuation allowance of $7.4 million inclusive of $5.3 million of valuation allowance related to state net operating losses, and $2.1 million related to tax credit carry-forwards.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (exclusive of interest and penalties) is as follows:
|
|
|
(in thousands) |
|
|
|
|
|
Gross Unrecognized Tax Benefits, Exclusive of Interest and Penalties |
|
|
|
Balance at January 31, 2015 |
|
$ |
11,730 |
|
|
Additions for tax positions of the current year |
|
|
122 |
|
|
Additions for tax positions of prior years |
|
|
250 |
|
|
Reduction for tax positions of prior years |
|
|
(1,524 |
) |
|
Settlements |
|
|
— |
|
|
Lapse of statute of limitations |
|
|
— |
|
|
Balance at January 30, 2016 |
|
$ |
10,578 |
|
|
Additions for tax positions of the current year |
|
|
117 |
|
|
Additions for tax positions of prior years |
|
|
— |
|
|
Reduction for tax positions of prior years |
|
|
(1,270 |
) |
|
Settlements |
|
|
— |
|
|
Lapse of statute of limitations |
|
|
(232 |
) |
|
Balance at January 28, 2017 |
|
$ |
9,193 |
|
|
Additions for tax positions of the current year |
|
|
72 |
|
|
Additions for tax positions of prior years |
|
|
882 |
|
|
Reduction for tax positions of prior years |
|
|
(973 |
) |
|
Settlements |
|
|
— |
|
|
Lapse of statute of limitations |
|
|
(101 |
) |
|
Balance at February 3, 2018 |
|
$ |
9,073 |
|
As of February 3, 2018, the Company reported total unrecognized benefits of $9.1 million, of which $7.2 million would affect the Company’s effective tax rate if recognized. As a result of previous positions taken, the Company recorded an increase of $0.1 million of interest and penalties during Fiscal 2017 in the line item “Income tax expense” in the Company’s Consolidated Statements of Income. Cumulative interest and penalties of $12.1 million are recorded in the line item “Other liabilities” in the Company’s Consolidated Balance Sheets as of February 3, 2018. The Company recognizes interest and penalties related to unrecognized tax benefits as part of income taxes. Within the next twelve months, the Company does not expect any significant changes in its unrecognized tax benefits.
As of January 28, 2017, the Company reported total unrecognized benefits of $9.2 million, of which $6.0 million would affect the Company’s effective tax rate if recognized. As a result of previous positions taken, the Company recorded an increase of $0.4 million of interest and penalties during Fiscal 2016 in the line item “Income tax expense” in the Company’s Consolidated Statements of Income. Cumulative interest and penalties of $13.8 million are recorded in the line item “Other liabilities” in the Company’s Consolidated Balance Sheets as of January 28, 2017.
The Company files tax returns in the U.S. federal jurisdiction, Puerto Rico and various state jurisdictions. The Company is open to examination by the IRS under the applicable statutes of limitations for Fiscal Years 2014 through 2017. The Company or its subsidiaries’ state and Puerto Rico income tax returns are open to audit for Fiscal Years 2012 through 2017, with a few exceptions, under the applicable statutes of limitations. There are ongoing federal and state audits in several jurisdictions, and the Company has accrued for possible exposures as required under Topic No. 740. The Company does not expect the settlement of these audits to have a material impact to its financial results.