EXPRESS, INC. - 10-Q filing on 2020-12-09

Income Taxes

9 Months Ended

Oct. 31, 2020

NOTE 5 | INCOME TAXES

The provision for income taxes is based on a current estimate of the annual effective tax rate, adjusted to reflect the effect of discrete items. The Company’s effective income tax rate may fluctuate from quarter to quarter as a result of a variety of factors, including the estimate of annual pre-tax income, the related changes in the estimate, and the

effect of discrete items. The impact of these items on the effective tax rate will be greater at lower levels of pre-tax earnings.

On March 27, 2020, the Coronavirus Aid Relief and Economic Security (“CARES”) Act was enacted into law. The CARES Act provides several provisions that impact the Company including the establishment of a five-year carryback of net operating losses originating in the tax years 2018, 2019, and 2020, temporarily suspending the 80% limitation on the use of net operating losses, relaxing limitation rules on business interest deductions, and retroactively clarifying that businesses may immediately write-off certain qualified leasehold improvement property dating back to January 1, 2018.

The Company’s effective tax rate was 19.2% and 48.1% for the thirteen weeks ended October 31, 2020 and November 2, 2019, respectively. The effective tax rate for the thirteen weeks ended October 31, 2020 reflects the impact of recording an additional valuation allowance of $16.0 million against estimated 2020 U.S. federal and state deferred tax assets and other tax credits of which a portion relates to 2020 U.S. federal net operating losses that could not be carried back to offset taxable income in the five-year carryback period as part of the CARES Act. This was partially offset by $8.0 million of tax benefit related to the portion of the estimated 2020 U.S. federal net operating losses that are able to be carried back to years with a higher federal statutory tax rate than is currently enacted. The effective tax rate for the thirteen weeks ended November 2, 2019 reflects a $1.4 million change in estimate from the second quarter provision due to a change in the previously forecasted annual effective tax rate.

The Company’s effective tax rate was 11.3% and 11.9% for the thirty-nine weeks ended October 31, 2020 and November 2, 2019, respectively. The effective tax rate for the thirty-nine weeks ended October 31, 2020 was less than the statutory rate due to the impact of establishing a valuation allowance against the Company’s net deferred tax assets, which includes $54.2 million of discrete tax expense from a valuation allowance against previously recognized deferred tax assets and a $39.1 million valuation allowance against estimated 2020 U.S. federal and state deferred tax assets and other tax credits of which a portion relates to 2020 U.S. federal net operating losses that could not be carried back to offset taxable income in the five-year carryback period as part of the CARES Act. This was partially offset by a $36.6 million tax benefit related to the portion of the estimated 2019 and 2020 U.S. federal net operating losses that are able to be carried back to years with a higher federal statutory tax rate than is currently enacted. The effective tax rate for the thirty-nine weeks ended November 2, 2019 reflects a tax benefit from a pre-tax loss offset by $2.6 million of discrete tax expense related to a tax shortfall for share-based compensation.

During the thirty-nine weeks ended November 2, 2019, the Company's estimated annual effective tax rate fluctuated with small changes in the estimated full-year pre-tax income due to near break-even forecasted pre-tax earnings. Differences between pre-tax book and taxable income, such as non-deductible executive compensation, caused the effective income tax rate to vary significantly. Accordingly, the Company did not believe that it could estimate the annual effective tax rate for 2019 with sufficient precision and, as permitted by GAAP, determined the income tax benefit for the thirty-nine weeks ended November 2, 2019 based upon year-to-date pre-tax loss and the effect of differences between book and taxable loss.

Due to the ongoing impact of the COVID-19 pandemic, the Company no longer believes it is able to objectively forecast taxable income in future years, which provides significant negative evidence when assessing whether the Company will more likely than not realize the full amount of the U.S. net deferred tax assets. As such, the Company recorded a valuation allowance against the full amount of the U.S. net deferred tax assets that are not forecasted to be utilized with the 2020 net operating loss carryback. We will continue to evaluate the Company’s ability to realize the deferred tax assets on a quarterly basis.