TILLY'S, INC.TLYS
TILLY'S, INC. Income Taxes Disclosure
Income Taxes
The components of income tax expense for fiscal years 2024, 2023 and 2022 were as follows (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| February 1, 2025 | February 3, 2024 | January 28, 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | — | $ | 83 | $ | (8) | |||||||||||
| State | 217 | 245 | 622 | ||||||||||||||
| 217 | 328 | 614 | |||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | — | 4,882 | 2,308 | ||||||||||||||
| State | — | 3,499 | 568 | ||||||||||||||
| — | 8,381 | 2,876 | |||||||||||||||
| Total income tax expense | $ | 217 | $ | 8,709 | $ | 3,490 | |||||||||||
A reconciliation of income tax expense to the amount computed at the federal statutory rate for fiscal years 2024, 2023 and 2022 is as follows (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| February 1, 2025 | February 3, 2024 | January 28, 2023 | |||||||||||||||
| Federal taxes at statutory rate | $ | (9,663) | $ | (5,414) | $ | 2,764 | |||||||||||
| State and local income taxes, net of federal benefit | (2,270) | (1,309) | 754 | ||||||||||||||
| Nondeductible executive compensation | (210) | 103 | 100 | ||||||||||||||
| Enhanced contribution deduction | (202) | (177) | (147) | ||||||||||||||
| Tax credits | (132) | (185) | (231) | ||||||||||||||
Share-based compensation discrete items (1) | 434 | 54 | 101 | ||||||||||||||
| Return to provision adjustments | 51 | 9 | 220 | ||||||||||||||
| Other | 137 | 233 | (71) | ||||||||||||||
| Change in valuation allowance | 12,072 | 15,395 | — | ||||||||||||||
| Total income tax expense | $ | 217 | $ | 8,709 | $ | 3,490 | |||||||||||
(1)This amount includes the impact of discrete items related to the expiration of stock options, exercises of stock options and the settlement of restricted stock that are recorded to income tax expense which represents share-based compensation cost previously recognized by us that was greater than the deduction allowed for income tax purposes based on the price of our common stock on the date of expiration, exercise or vesting.
Deferred income taxes reflect the net tax effects of: (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes; and (b) operating loss and tax credit carry-forwards. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.
Significant components of deferred tax assets and liabilities as of February 1, 2025 and February 3, 2024 were as follows (in thousands):
| February 1, 2025 | February 3, 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| Operating lease liabilities | $ | 50,661 | $ | 60,821 | |||||||
| Net operating loss carryforwards | 13,932 | 5,305 | |||||||||
| Inventories | 3,461 | 2,441 | |||||||||
| Share-based compensation | 1,434 | 1,324 | |||||||||
| Accrued expenses | 1,381 | 1,342 | |||||||||
| Deferred revenue | 1,336 | 1,272 | |||||||||
| Compensation and benefits | 601 | 573 | |||||||||
| Other | 2,278 | 1,520 | |||||||||
| Total deferred tax assets | 75,084 | 74,598 | |||||||||
| Less: valuation allowance | (27,528) | (15,395) | |||||||||
| Deferred tax assets, net of valuation allowance | 47,556 | 59,203 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Operating lease assets | (42,033) | (51,948) | |||||||||
| Property and equipment | (3,885) | (5,935) | |||||||||
| Prepaid expenses | (1,585) | (1,132) | |||||||||
| Marketable securities | (53) | (188) | |||||||||
| Total deferred tax liabilities | (47,556) | (59,203) | |||||||||
| Net deferred tax asset | $ | — | $ | — | |||||||
Management assesses the available evidence to estimate whether sufficient future taxable income will be generated to permit use of its existing deferred tax assets. Based on management's current estimates, management believes that our projected future taxable income will not be sufficient to substantiate that our net deferred tax assets are realizable at a more-likely-than-not level.
On the basis of this evaluation, as of February 1, 2025 and February 3, 2024, a valuation allowance of $27.5 million and $15.4 million, respectively, has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of deferred tax asset considered realizable, however, could be adjusted if additional objectively verifiable positive evidence materializes in future reporting periods, such as a demonstrated operating profitability.
As of February 1, 2025 we had federal and state net operating loss ("NOL") carryforwards of $53.0 million and $45.6 million respectively. Federal NOL carryforwards totaling $53.0 million generated after 2017 may be carried forward indefinitely but can only be utilized to offset 80% of future taxable income. State NOL carryforwards totaling $45.6 million begin to expire in 2029, unless previously utilized.
Utilization of the Company's NOL carryforwards may be subject to substantial annual limitations in the event a cumulative ownership change has occurred, or that could occur in the future, as required by Section 382 of the Code. In general, an "ownership change," as defined by Section 382 of the Code, results from a transaction, or series of transactions over a three-year period, resulting in an ownership change of more than 50% of the outstanding common stock of a company by certain stockholders or public groups. Such an ownership change may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. If ownership changes have occurred or occur in the future, the amount of remaining tax attribute carryforwards available to offset taxable income and income tax expense in future years may be restricted or eliminated. If eliminated, the related asset would be removed from deferred tax assets with a corresponding offset to valuation allowance. The Company has not completed an IRC Section 382/383 analysis regarding the limitation of net operating loss carryforwards and does not expect this analysis to be completed within the next twelve months.
Uncertain Tax Positions
As of February 1, 2025 and February 3, 2024, there were no material unrecognized tax positions. We do not anticipate that there will be a material change in the balance of the unrecognized tax positions in the next 12 months. Any interest and penalties related to uncertain tax positions are recorded in income tax expense. We did not recognize any interest or penalties related to unrecognized tax positions during fiscal years 2024, 2023 and 2022.
We file income tax returns in the United States federal jurisdiction and in various state and local jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. Fiscal years 2021 through 2023 remain subject to examination for federal tax purposes and fiscal years 2020 through 2023 remain subject to examination in significant state tax jurisdictions.
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.