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 SEC on March 30, 2021, which is available on the SEC's website 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 Barn
Teen, 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, Australia and the United
Kingdom, offer international shipping to customers worldwide, and have
unaffiliated franchisees that operate stores in the Middle East, the
Philippines, Mexico, South Korea and 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 Kids and
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 $850,338,000 and 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 $226,517,000 in capital expenditures during
fiscal 2021, and to provide shareholder returns of approximately $1,086,972,000
in fiscal 2021 through share repurchases and dividends.

In fiscal 2021, diluted earnings per share was $14.75 (which included a $0.10
impact from acquisition-related expenses of Outward, Inc.) versus $8.61 in
fiscal 2020 (which included a $0.26 impact related to store asset impairments, a
$0.13 impact from acquisition-related expenses of Outward, Inc., an $0.11 impact
related to inventory write-offs, and a $0.06 benefit related to the adjustment
of certain deferred tax assets and liabilities).


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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.

Around 2022


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 $350,000,000 in 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.


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                             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      $ 2,526,241
West 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.



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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         

3,975,000

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    $ 4,613,973         56.0  %    $ 4,146,920         61.1  %

1Includes rental charges of $728.0 million and $696.3 million in fiscal years 2021 and 2020, respectively.


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 $11,378,000 resulting 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.


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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

                                                                                   % Net                                        % Net
(In thousands)                                       Fiscal 2021                Revenues            Fiscal 2020              Revenues
Selling, general and administrative expenses        $ 2,178,847                  26.4  %             $1,725,572               25.4  %


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 $27,069,000 in fiscal 2020 due in part to the impact of COVID-19
on our retail stores in that did not recur in fiscal 2021.

INCOME TAXES


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,
2022 include 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 $269,238,000 payable within 12 months. See
Note E to our Consolidated Financial Statements for amount outstanding as of
January 30, 2022 related 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 $1,621,891,000 expected to be settled within
12 months.

In addition, we had $39,335,000 of 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.

Dividends


In fiscal 2021 and fiscal 2020, total cash dividends declared were approximately
$199,395,000, or $2.60 per common share, and $163,316,000, or $2.02 per common
share, respectively. In March 2022, our Board of Directors authorized a 10%
increase in our quarterly cash dividend, from $0.71 to $0.78 per 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.

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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


As of January 30, 2022, we held $850,338,000 in cash and cash equivalents, the
majority of which was held in interest-bearing demand deposit accounts and money
market funds, and of which $139,418,000 was 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 $500,000,000 unsecured 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 $250,000,000 to provide for a total of
$750,000,000 of unsecured revolving credit. Our Credit Facility also provided
for a $300,000,000 unsecured 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, 2026 and removed the $300,000,000 term 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, $11,745,000 in 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 $4,429,000 was 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 $1,371,147,000
compared to $1,274,848,000 in 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 $226,247,000 compared
to $168,884,000 in fiscal 2020 and was primarily attributable to purchases of
property and equipment related to technology and supply chain enhancements.


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Cash Flows from Financing Activities

For fiscal 2021, net cash used in financing activities was $1,491,985,000
compared to $343,019,000 in 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.

Merchandise inventories

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, 2022 and January 31, 2021, our inventory obsolescence reserves were
$13,955,000 and $9,827,000, respectively.

Long-lived assets

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 $19,204,000 related to
property and equipment and $7,865,000 related 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


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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.

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.

Income taxes


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 $33,612,000 of
gross unrecognized tax benefits, of which $28,090,000 would, 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, 2022 and January 31, 2021, our accruals for the payment of
interest and penalties totaled $5,723,000 and $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 $0 to $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.



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