WILLIAMS SONOMA INC MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
The following discussion and analysis of our financial condition, results of operations, and liquidity and capital resources for the 52 weeks ended
January 30, 2022("fiscal 2021"), and the 52 weeks ended January 31, 2021("fiscal 2020") should be read in conjunction with our Consolidated Financial Statements and notes thereto. All explanations of changes in operational results are discussed in order of magnitude. A discussion and analysis of our financial condition, results of operations, and liquidity and capital resources for the 52 weeks ended January 31, 2021("fiscal 2020"), compared to the 52 weeks ended February 2, 2020("fiscal 2019"), can be found under Item 7 in our Annual Report on Form 10-K for fiscal 2020, filed with the SECon March 30, 2021, which is available on the SEC'swebsite at www.sec.gov and under the Financial Reports section of our Investor Relations website. OVERVIEW Williams-Sonoma, Inc.is a specialty retailer of high-quality sustainable products for the home. Our products, representing distinct merchandise strategies - Williams Sonoma, Pottery Barn, Pottery Barn Kids, Pottery BarnTeen, West Elm, Williams Sonoma Home, Rejuvenation, and Mark and Graham - are marketed through e-commerce websites, direct-mail catalogs and retail stores. These brands are also part of The Key Rewards, our free-to-join loyalty program that offers members exclusive benefits across the Williams-Sonoma family of brands. We operate in the U.S., Puerto Rico, Canada, Australiaand the United Kingdom, offer international shipping to customers worldwide, and have unaffiliated franchisees that operate stores in the Middle East, the Philippines, Mexico, South Koreaand India, as well as e-commerce websites in certain locations. We are also proud to be a leader in our industry with our Environmental, Social and Governance ("ESG") efforts. In March 2020, we announced the temporary closures of all of our retail store operations to protect our employees, customers and the communities in which we operate and to help contain the COVID-19 pandemic. As of January 30, 2022, all of our stores have reopened for in-person shopping. However, we have experienced, and may continue to experience, reduced traffic in our stores due to the continued uncertainty around COVID-19. During fiscal 2021, global supply chain disruptions, including COVID-19 related factory closures and increased port congestion, caused delays in inventory receipts, increased raw material costs, shipping container shortages and higher shipping-related charges. We expect these supply chain challenges to continue into fiscal 2022, which could negatively impact our business.
Financial results for the 2021 financial year
Net revenues in fiscal 2021 increased by
$1,462,747,000, or 21.6%, compared to fiscal 2020 with comparable brand revenue growth of 22.0% and double-digit comparable brand revenue growth across all our brands. This was primarily driven by strength in both e-commerce and retail, primarily due to an increase in furniture sales, as well as the impact of stores operating at a limited capacity due to COVID-19 during portions of fiscal 2020. The increase in net revenues also included a 23.4% increase in international revenues, related to both our franchise and company-owned operations. On a two-year basis, comparable brand revenues increased 39.0%. During fiscal 2021, we delivered double-digit comparable brand revenue growth across all our brands. In West Elm, comparable brand revenue growth was 33.1%, with all categories driving growth. The upholstery and outdoor businesses were strong, and customers responded well to new products, including bedroom, dining, storage, and occasional categories. Pottery Barn, our largest brand, delivered 23.9% comparable brand revenue growth during the year driven by growth in all product categories, including our core lifestyle furniture category, home furnishings, decorating, our design services, and our furniture-advantaged growth initiatives such as apartment and our curated market-place assortment. Our growth initiatives of Outdoor and Bath Renovation also out-paced our brand growth for the year. The Williams Sonoma brand delivered comparable brand revenue growth of 10.5%, with growth across all key categories. Strength in both electrics and home furniture drove these results. In our Pottery Barn Kidsand Teen businesses, we saw comparable brand revenue growth of 11.6% driven by our proprietary 100% GREENGUARD GOLD furniture and back-to-school assortment. We also saw outsized growth in Baby, a key initiative and entry point to the brands. This growth however, was impacted by the supply chain disruptions around the world, particularly the shutdown and backlog in Vietnam. We expect to be impacted by this backlog until at least the second quarter of fiscal 2022. Finally, our emerging brands Rejuvenation and Mark and Graham, combined, accelerated to 33.0% comparable brand revenue growth. We ended the year with a cash balance of $850,338,000and generated positive operating cash flow of $1,371,147,000. In addition to our strong cash balance, we also ended the year with no outstanding borrowings under our revolving line of credit. This strong liquidity position allowed us to fund the operations of the business by investing over $226,517,000in capital expenditures during fiscal 2021, and to provide shareholder returns of approximately $1,086,972,000in fiscal 2021 through share repurchases and dividends. In fiscal 2021, diluted earnings per share was $14.75(which included a $0.10impact from acquisition-related expenses of Outward, Inc.) versus $8.61in fiscal 2020 (which included a $0.26impact related to store asset impairments, a $0.13impact from acquisition-related expenses of Outward, Inc., an $0.11impact related to inventory write-offs, and a $0.06benefit related to the adjustment of certain deferred tax assets and liabilities). 27 -------------------------------------------------------------------------------- Table of Contents Our three key differentiators - our in-house design, our digital-first channel strategy, and our values - continued to provide the framework for execution both in our core business and in our growth areas.
Throughout fiscal 2021, we continued our deliberate reduction in site-wide promotional cadence across all of our brands, and instead focused on delivering challenging and inspiring content. This pricing power has also given us the flexibility to absorb supply chain costs and aggressively fund marketing efforts.
Our cross-brand loyalty program, The Key, drove record levels of engagement and membership. Our recently launched cross-brand credit card has produced cardholder spend and cross-brand activity that has exceeded our expectations. We are also focused on personalization efforts in our digital marketing. We continue to leverage our in-house managed, first-party-data across our brands. which we believe positions us well for the increased focus on consumer privacy and the "cookie-less" future that is rapidly approaching. As a digital-first company, we are in continuous pursuit of incremental improvement to our customers' shopping journey online. We have improved several product-finding and purchasing experiences on our websites; from improved room styling, native registry applications, and the removal of friction in the checkout process. Additionally, we relentlessly focus on continued optimization and automation in our distribution centers and logistics networks to improve our service times. On the sustainability front, we take great pride in the progress we are making within our impact initiatives and ESG leadership across the home furnishings industry. These commitments are reflected in the high quality, durable, sustainable products that we offer our customers, and continues to distinguish our company and our brands.
As we look forward to the year ahead, our focus remains on executing against our opportunities to drive revenue and earnings growth. We believe revenue growth, in addition to strength across our core businesses, will be fueled by our strategic initiatives, including our business to business division and marketplace, our emerging brands, and our global operations. We plan to drive this profitably from leverage across the income statement from ongoing higher sales growth; additional accretion from our accelerating growth initiatives that have a higher operating margin profile; an accelerating shift online where the operating margin is higher; strong merchandise margins from the pricing power our proprietary and vertically-integrated products provide; continued occupancy leverage from further store closures and reduced rents; various long-term supply chain efficiencies such as automation and better in-stock inventory levels; and leverage from overall strong financial discipline throughout, keeping expense growth below sales growth. To drive this future growth, we plan to invest approximately
$350,000,000in the business with over 80% of the spend prioritized on technology and supply chain initiatives primarily to support e-commerce, including the addition of a new automated distribution center in Arizona. In addition, we plan to return excess cash to shareholders in the form of increased dividend payouts and elevated share repurchases. For information on risks, please see "Risk Factors" in Part I, Item 1A. 28
Table of Contents Results of Operations NET REVENUES Net revenues consist of sales of merchandise to our customers through our e-commerce websites, direct-mail catalogs, and at our retail stores and include shipping fees received from customers for delivery of merchandise to their homes. Our revenues also include sales to our franchisees and wholesale customers, breakage income related to our stored-value cards, and incentives received from credit card issuers in connection with our private label and co-branded credit cards. Net revenues in fiscal 2021 increased by
$1,462,747,000, or 21.6%, compared to fiscal 2020, with comparable brand revenue growth of 22.0% and double-digit comparable brand revenue growth across all our brands. This was primarily driven by strength in both e-commerce and retail, primarily due to an increase in furniture sales, as well as the impact of stores operating at a limited capacity due to COVID-19 during portions of fiscal 2020. The increase in net revenues also included a 23.4% increase in international revenues, related to both our franchise and company-owned operations. On a two-year basis, comparable brand revenues increased 39.0%. The following table summarizes our net revenues by brand for fiscal 2021 and fiscal 2020: (In thousands) Fiscal 2021 Fiscal 2020 Pottery Barn $ 3,120,687 $ 2,526,241West Elm 2,234,548 1,682,254 Williams Sonoma 1,345,851 1,242,271 Pottery Barn Kids and Teen 1,139,893 1,042,531 Other 1 404,957 289,892 Total $ 8,245,936 $ 6,783,189
1Consists primarily of net revenues from Rejuvenation, our international franchise businesses and Mark and Graham.
Comparable brand revenue
Comparable brand revenue includes comparable store sales and e-commerce sales, including through our direct-mail catalog, as well as shipping fees, sales returns and other discounts associated with current period sales. Comparable stores are defined as permanent stores where gross square footage did not change by more than 20% in the previous 12 months, and which have been open for at least 12 consecutive months without closure for seven or more consecutive days within the same fiscal month. Comparable stores that were temporarily closed during either year due to COVID-19 were not excluded from the comparable brand revenue calculation. Outlet comparable store net revenues are included in their respective brands. Sales to our international franchisees are excluded from comparable brand revenue as their stores and e-commerce websites are not operated by us. Sales from certain operations are also excluded until such time that we believe those sales are meaningful to evaluating their performance. Additionally, comparable brand revenue growth for newer concepts is not separately disclosed until such time that we believe those sales are meaningful to evaluating the performance of the brand. Comparable brand revenue growth Fiscal 2021 Fiscal 2020 Pottery Barn 23.9 % 15.2 % West Elm 33.1 15.2 Williams Sonoma 10.5 23.8 Pottery Barn Kids and Teen 11.6 16.6 Total 1 22.0 % 17.0 %
1The brand’s total comparable store sales growth includes the results of Rejuvenation and Mark and Graham.
Table of Contents RETAIL STORE DATA Fiscal 20211 Fiscal 20201 Store count - beginning of year 581 614 Store openings 12 10 Store closings (49) (43) Store count - end of year 544 581 Store selling square footage at year-end 3,821,000
Store in leased area (“LSF”) at the end of the year 6,004,000 6,301,000
1 Retail store data for fiscal 2021 and fiscal 2020 includes stores temporarily closed due to COVID-19. All stores were reopened as of the end of fiscal 2021. Fiscal 2021 Fiscal 2020 Store Avg. LSF Store Avg. LSF Count Per Store Count Per Store Pottery Barn 188 14,500 195 14,600 Williams Sonoma 174 6,800 198 6,800 West Elm 121 13,200 121 13,100 Pottery Barn Kids 52 7,700 57 7,800 Rejuvenation 9 9,400 10 8,500 Total 544 11,000 581 10,800 COST OF GOODS SOLD % Net % Net (In thousands) Fiscal 2021 Revenues Fiscal 2020 Revenues Cost of goods sold 1
$ 4,613,97356.0 % $ 4,146,92061.1 %
1Includes rental charges of
Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses, freight-to-store expenses and other inventory related costs such as replacements, damages, obsolescence and shrinkage. Occupancy expenses consist of rent, other occupancy costs (including property taxes, common area maintenance and utilities) and depreciation. Shipping costs consist of third-party delivery services and shipping materials. Our classification of expenses in cost of goods sold may not be comparable to other public companies, as we do not include non-occupancy-related costs associated with our distribution network in cost of goods sold. These costs, which include distribution network employment, third-party warehouse management and other distribution-related administrative expenses, are recorded in selling, general and administrative expenses.
Fiscal 2021 vs. Fiscal 2020
Cost of goods sold increased by
$467,053,000, or 11.3%, in fiscal 2021 compared to fiscal 2020. Cost of goods sold as a percentage of net revenues decreased to 56.0% in fiscal 2021 from 61.1% in fiscal 2020. This decrease was primarily driven by higher selling margins from reduced promotional activity and the leverage of occupancy costs from higher sales and low occupancy dollar growth, as well as inventory write-offs of approximately $11,378,000resulting from the closure of our outlet stores due to COVID-19 in the first quarter of fiscal 2020 that did not recur in fiscal 2021. 30 -------------------------------------------------------------------------------- Table of Contents SELLING, GENERAL AND ADMINISTRATIVE EXPENSES % Net % Net (In thousands) Fiscal 2021 Revenues Fiscal 2020 Revenues Selling, general and administrative expenses $ 2,178,84726.4 % $1,725,57225.4 % Selling, general and administrative expenses consist of non-occupancy-related costs associated with our retail stores, distribution and manufacturing facilities, customer care centers, supply chain operations (buying, receiving and inspection) and corporate administrative functions. These costs include employment, advertising, third-party credit card processing and other general expenses. Fiscal 2021 vs. Fiscal 2020 Selling, general and administrative expenses increased by $453,275,000, or 26.3%, for fiscal 2021, compared to fiscal 2020. Selling, general and administrative expenses as a percentage of net revenues increased to 26.4% for fiscal 2021 from 25.4% for fiscal 2020. This increase was primarily driven by significantly reduced advertising costs for fiscal 2020 as a result of our financial response to COVID-19 as well as an incremental investment in highly efficient advertising for fiscal 2021. This increase was partially offset by the leverage of employment costs and other general expenses from higher sales and overall cost discipline, as well as store asset impairment charges of approximately $27,069,000in fiscal 2020 due in part to the impact of COVID-19 on our retail stores in that did not recur in fiscal 2021.
The effective income tax rate was 22.4% for fiscal 2021 and 23.9% for fiscal 2020. The decrease in the effective tax rate from fiscal 2020 is primarily due to higher excess tax benefit from stock-based compensation in fiscal 2021 compared to fiscal 2020.
CASH AND CAPITAL RESOURCES
Material cash needs
We are party to contractual obligations involving commitments to make payments to third parties in the future. Certain contractual obligations are reflected on our Consolidated Balance Sheet as of
January 30, 2022, while others are considered future obligations. Our material cash requirements as of January 30, 2022include the following contractual obligations and commitments arising in the normal course of business: •Our operating leases had fixed lease payment obligations, including imputed interest, of $1,452,522,000, with $269,238,000payable within 12 months. See Note E to our Consolidated Financial Statements for amount outstanding as of January 30, 2022related to operating leases. •Our purchase obligations consist primarily of open purchase orders to purchase inventory as well as commitments for products and services used in the normal course of business. As of January 30, 2022, our purchase obligations were approximately $1,831,551,000, with $1,621,891,000expected to be settled within 12 months. In addition, we had $39,335,000of unrecognized tax benefits recorded in our accompanying Consolidated Balance Sheet as of January 30, 2022, for which we cannot make a reasonably reliable estimate of the amount and period of payment. See Note D to our Consolidated Financial Statements for information related to income taxes. We are party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to commercial matters, operating leases, trademarks, intellectual property and financial matters. Under these contracts, we may provide certain routine indemnification relating to representations and warranties or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.
See Note I to our consolidated financial statements for more information on our commitments and contingencies.
In fiscal 2021 and fiscal 2020, total cash dividends declared were approximately
$199,395,000, or $2.60per common share, and $163,316,000, or $2.02per common share, respectively. In March 2022, our Board of Directors authorized a 10% increase in our quarterly cash dividend, from $0.71to $0.78per common share, subject to capital availability. Our quarterly cash dividend may be limited or terminated at any time. Stock Repurchase Program
See the section entitled “Share Repurchase Program” in Part II, Item 5 of this Annual Report on Form 10-K for more information.
31 -------------------------------------------------------------------------------- Table of Contents Liquidity Outlook We believe our cash on hand, cash flows from operations, and our available credit facilities will provide adequate liquidity for our business operations as well as capital expenditures, dividends, share repurchases, and other liquidity requirements associated with our business operations over the next 12 months. We are currently not aware of any other trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months.
Sources of liquidity
January 30, 2022, we held $850,338,000in cash and cash equivalents, the majority of which was held in interest-bearing demand deposit accounts and money market funds, and of which $139,418,000was held by our international subsidiaries. As is consistent within our industry, our cash balances are seasonal in nature, with the fourth quarter historically representing a significantly higher level of cash than other periods. Throughout the fiscal year, we utilize our cash resources to build our inventory levels in preparation for our fourth quarter holiday sales. Our largest source of operating cash flows is cash collections from the sale of our merchandise throughout the year. In fiscal 2022, we plan to use our cash resources to fund our inventory and inventory-related purchases, employment related-costs, advertising and marketing initiatives, rental payments on our leases, stock repurchases and dividend payments, property and equipment purchases, and the payment of income taxes. In addition to our cash balances on hand, we have a credit facility (the "Credit Facility") which provides for a $500,000,000unsecured revolving line of credit (the "Revolver"). The Revolver may be used to borrow revolving loans or to request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders, at such lenders' option, to increase the Revolver by up to $250,000,000to provide for a total of $750,000,000of unsecured revolving credit. Our Credit Facility also provided for a $300,000,000unsecured term loan facility (the "Term Loan"), which was fully repaid in February 2021. In September 2021, we entered into an amendment to our Credit Facility (the "Amended Credit Agreement"), which extended the date of the Revolver to September 30, 2026and removed the $300,000,000term loan component available under the existing Credit Facility. The Amended Credit Agreement maintains the interest rate of the Revolver. The interest rate applicable to the Revolver is variable and may be elected by us as: (i) the LIBOR (or future alternative rate) plus an applicable margin based on our leverage ratio ranging from 0.91% to 1.775% or (ii) a base rate as defined in the Credit Facility, plus an applicable margin based on our leverage ratio ranging from 0% to 0.775%. During fiscal 2021, we had no borrowings under our Revolver. Additionally, as of January 30, 2022, $11,745,000in issued but undrawn standby letters of credit were outstanding under our Revolver. The standby letters of credit were primarily issued to secure the liabilities associated with workers' compensation and other insurance programs. The Credit Facility contains certain restrictive loan covenants, including, among others, a financial covenant requiring a maximum leverage ratio (funded debt adjusted for operating lease liabilities to earnings before interest, income tax, depreciation, amortization and rent expense), and covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of assets. As of January 30, 2022, we were in compliance with our financial covenants under our credit facilities and, based on our current projections, we expect to remain in compliance throughout the next 12 months. Letter of Credit Facilities We have three unsecured letter of credit reimbursement facilities for a total of $35,000,000. The letter of credit facilities contain covenants that are consistent with our Credit Facility. Interest on unreimbursed amounts under the letter of credit facilities accrues at a base rate as defined in the credit facility, plus an applicable margin based on our leverage ratio. As of January 30, 2022, an aggregate of $4,429,000was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. The latest expiration date possible for any future letters of credit issued under the facilities is January 19, 2023.
Cash flow from operating activities
For fiscal 2021, net cash provided by operating activities was
$1,371,147,000compared to $1,274,848,000in fiscal 2020. For fiscal 2021, net cash provided by operating activities was primarily attributable to net earnings adjusted for non-cash items, an increase in gift card and other deferred revenue (as a result of an increase in sales), and increases in accounts payable and accrued expenses, partially offset by higher spending on merchandise inventories, reflective of the strong customer demand for our products during fiscal 2021. Net cash provided by operating activities compared to fiscal 2020 increased primarily due to an increase in net earnings adjusted for non-cash items, partially offset by higher spending on merchandise inventories as a result of our increased sales, as well as an increase in accrued expenses.
Cash flow from investing activities
For fiscal 2021, net cash used in investing activities was
$226,247,000compared to $168,884,000in fiscal 2020 and was primarily attributable to purchases of property and equipment related to technology and supply chain enhancements. 32 -------------------------------------------------------------------------------- Table of Contents Cash Flows from Financing Activities For fiscal 2021, net cash used in financing activities was $1,491,985,000compared to $343,019,000in fiscal 2020 and was primarily attributable to the repurchases of common stock, the repayment of our term loan and payment of dividends. Net cash used in financing activities for fiscal 2021 increased compared to fiscal 2020 primarily due to an increase in repurchases of common stock and the repayment of our term loan in fiscal 2021.
IMPACT OF INFLATION
While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we have experienced varying levels of inflation, resulting in part from various supply chain disruptions, increased shipping and transportation costs, increased product costs, increased labor costs in the supply chain and other disruptions caused by the COVID19 pandemic and the uncertain economic environment. However, our unique operating model and pricing power helped mitigate these increased costs during fiscal 2021. We cannot be assured that our results of operations and financial condition will not be materially impacted by inflation in the future.
CRITICAL ACCOUNTING ESTIMATES
Our Consolidated Financial Statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These estimates are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates.
Significant estimates used in our inventory valuation are obsolescence (including excess and slow-moving inventory and declining cost or market reserves) and inventory decline estimates. We reserve for obsolescence based on historical trends of inventory sold below cost and specific identification.
The reserves for shrinkage are recorded throughout the year based on historical shrinkage results, cycle count results within our distribution centers, expectations of future shrinkage and current inventory levels, and are therefore subject to uncertainty. Actual shrinkage is recorded at year-end based on the results of our cycle counts and year end physical inventory counts, and can vary from our estimates recorded throughout the year due to such factors as changes in operations, the mix of our inventory (which ranges from large furniture to small tabletop items) and execution against loss prevention initiatives in our stores, distribution facilities and off-site storage locations, and with our third-party warehouse and transportation providers. Accordingly, there is no shrinkage reserve at year-end. Historically, actual shrinkage has not differed materially from our estimates. Our obsolescence and shrinkage reserve calculations contain estimates that require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. We have made no material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves throughout the year. In addition, we do not believe a 10% change in our inventory reserves would have a material effect on our net earnings. As of
January 30, 2022and January 31, 2021, our inventory obsolescence reserves were $13,955,000and $9,827,000, respectively.
Property, plant and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful life of the assets.
We review the carrying value of all long-lived assets for impairment, primarily at an individual store level, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Our impairment analyses determine whether projected cash flows from operations are sufficient to recover the carrying value of these assets. The asset group is comprised of both property and equipment and operating lease right-of-use assets. Impairment may result when the carrying value of the asset or asset group exceeds the estimated undiscounted future cash flows over its remaining useful life. Our estimate of undiscounted future cash flows over the store lease term is based upon our experience, the historical operations of the stores and estimates of future store profitability and economic conditions. The estimates of future store profitability and economic conditions require estimating such factors as sales growth, gross margin, employment costs, lease escalations, inflation and the overall economics of the retail industry, and are therefore subject to variability and difficult to predict. For right-of-use assets, we determine the fair value of the assets by using estimated market rental rates. These estimates can be affected by factors such as future store results, real estate supply and demand, store closure plans, and economic conditions that can be difficult to predict. Actual future results may differ from those estimates. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the excess of the asset or asset group's net carrying value over its estimated fair value. During fiscal 2021, no impairment charges were recognized. During fiscal 2020, we recognized asset impairment charges of approximately
$19,204,000related to property and equipment and $7,865,000related to right-of use assets for our retail stores, which is recognized within selling, general and administrative expenses. During fiscal 2019, we recognized an approximate $3,303,000, net 33 -------------------------------------------------------------------------------- Table of Contents of tax, reduction to the opening balance of retained earnings resulting from the impairment of certain long-lived assets upon adoption of Accounting Standards Update ("ASU") 2016-02, Leases.
The significant estimates used in accounting for our leases relate to the incremental borrowing rate used in the present value of lease obligations calculation. As our leases generally do not provide information about the rate implicit in the lease, we utilize an estimated incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment. We use judgment in determining our incremental borrowing rate, which is applied to each lease based on the lease term. A 50 basis point increase or decrease in the incremental borrowing rate would not have a material impact on the value of our new or remeasured right-of-use assets and lease liabilities. As of fiscal 2021 and fiscal 2020, our incremental borrowing rates were 3.2% and 3.6%, respectively. Many of our leases contain renewal and early termination options. The option periods are generally not included in the lease term used to measure our lease liabilities and right-of-use assets upon commencement, as we do not believe the exercise of these options to be reasonably certain. We remeasure the lease liability and right-of-use asset when we are reasonably certain to exercise a renewal or an early termination option. We use judgment in determining lease classification, including our determination of the economic life and the fair market value of the identified asset. The fair market value of the identified asset is generally estimated based on comparable market data provided by third-party sources.
We record reserves for our estimates of the additional income tax liability that is more likely than not to result from the ultimate resolution of foreign and domestic tax examinations. The results of these examinations and negotiations with taxing authorities may affect the ultimate settlement of these issues. We review and update the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax examination, upon expiration of statutes of limitation, or upon occurrence of other events. As of
January 30, 2022, we had $33,612,000of gross unrecognized tax benefits, of which $28,090,000would, if recognized, affect the effective tax rate. Additionally, we accrue interest and penalties related to these unrecognized tax benefits in the provision for income taxes. As of January 30, 2022and January 31, 2021, our accruals for the payment of interest and penalties totaled $5,723,000and $8,225,000, respectively. Due to the potential resolution of tax issues, it is reasonably possible that the balance of our gross unrecognized tax benefits could decrease within the next twelve months by a range of $0to $3,300,000. In order to compute income tax on an interim basis, we estimate what our effective tax rate will be for the full fiscal year and adjust these estimates throughout the year as necessary. Adjustments to our income tax provision due to changes in our estimated effective tax rate are recorded in the interim period in which the change occurs. The tax expense (or benefit) related to items other than ordinary income is individually computed and recognized when the items occur. Our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of our earnings in various taxing jurisdictions or changes in tax law. Our effective tax rates for fiscal 2021 and fiscal 2020 were 22.4% and 23.9%, respectively. 34
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