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Derivative Financial Instruments
 12 Months Ended
Feb. 01, 2015
Derivative Financial Instruments

Note M: Derivative Financial Instruments

We have retail and e-commerce businesses in Canada, Australia and the United Kingdom, and operations throughout Asia and Europe, which expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. While the impact of foreign currency exchange rate fluctuations was not significant to us in fiscal 2014, we have continued to see volatility in the exchange rates in the countries in which we do business. As we continue to expand globally, the foreign currency exchange risk related to the transactions of our foreign subsidiaries may increase. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for speculative purposes.

The assets or liabilities associated with the derivative instruments are measured at fair value and recorded in either other current assets or other current liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative instrument is designated as a hedge and qualifies for hedge accounting in accordance with ASC 815, Derivatives and Hedging.

 

Cash Flow Hedges

We enter into foreign currency forward contracts designated as cash flow hedges for forecasted inventory purchases in U.S. dollars by our foreign subsidiaries. These hedges generally have terms of up to 12 months. All hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted inventory purchase occurs or the respective contract reaches maturity. Subsequently, as the inventory is sold to the customer, we reclassify amounts previously recorded in OCI to cost of goods sold. Changes in the fair value of the forward contract related to interest charges or “forward points” are excluded from the assessment and measurement of hedge effectiveness and are recorded immediately in other income (expense), net. Based on the rates in effect as of February 1, 2015, we expect to reclassify a net gain of approximately $1,321,000 from OCI to cost of goods sold over the next 12 months.

We also enter into non-designated foreign currency forward contracts to reduce the exchange risk associated with our assets and liabilities denominated in a foreign currency. Any foreign exchange gains (losses) related to these contracts are recognized in other income (expense), net.

As of February 1, 2015, and February 2, 2014, we had foreign currency forward contracts outstanding (in U.S. dollars) as follows:

 

In thousands Feb. 1, 2015   Feb. 2, 2014  

Contracts to sell Canadian dollars and buy U.S. dollars

Contracts designated as cash flow hedges

 $ 15,900    $ 16,500   

Contracts not designated as cash flow hedges 1

 $ 0    $ 3,500   

Contracts to sell Australian dollars and buy U.S. dollars

Contracts not designated as cash flow hedges

 $ 21,000    $ 5,500   

 

1 These contracts are no longer designated as cash flow hedges as the related inventory purchases have occurred.

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measureable ineffectiveness of the hedge is recorded in other income (expense), net. During fiscal 2014 and fiscal 2013, no gain or loss was recognized for cash flow hedges due to hedge ineffectiveness. All hedges were deemed effective for assessment purposes as of February 1, 2015 and February 2, 2014.

The effect of derivative instruments in our Consolidated Financial Statements, pre tax, was as follows:

 

In thousands Fiscal 2014
(52 Weeks)		   Fiscal 2013
(52 Weeks)		  

Net gain recognized in OCI

 $ 1,153    $ 870   

Net gain reclassified from OCI into cost of goods sold

 $ 573    $ 129   

Net foreign exchange gain (loss) recognized in other income (expense):

Instruments designated as cash flow hedges1

 $ (155 )  $ (109 ) 

Instruments not designated or de-designated2

 $ (1,795 )  $ 906   

 

1 Changes in fair value of the forward contract related to interest charges or “forward points.”
2 Changes in fair value subsequent to de-designation for instruments no longer designated as cash flow hedges, and changes in fair value related to instruments not designated as cash flow hedges.

 

The fair values of our derivative financial instruments are presented below. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note N.

 

In thousands Balance sheet location Feb. 1, 2015      Feb. 2, 2014  

Derivatives designated as hedging instruments:

Cash flow hedge foreign currency forward contracts

 Other current assets $ 1,015    $ 485   

Cash flow hedge foreign currency forward contracts

 Other current liabilities   (9 )      0   

Total, net

   $ 1,006      $ 485   

Derivatives not designated as hedging instruments:

Foreign currency forward contracts

 Other current assets $ 427    $ 222   

Foreign currency forward contracts

 Other current liabilities   0        (40 ) 

Total, net

   $ 427      $ 182   

We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria as discussed in ASC 210, Balance Sheet, because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement.

Amounts recorded within accumulated other comprehensive income (“AOCI”) associated with our derivative instruments, pre-tax, were as follows:

 

In thousands

Fiscal 2014

(52 Weeks)

   Fiscal 2013
(52 Weeks)		  

AOCI beginning balance amount of gain (loss)

 $ 741    $ 0   

Amounts recognized in OCI before reclassifications

   1,153      870   

Amounts reclassified from OCI into cost of goods sold

   (573 )    (129 ) 

AOCI ending balance amount of gain (loss)

 $       1,321    $      741