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DERIVATIVE FINANCIAL INSTRUMENTS
 9 Months Ended
Oct. 30, 2016
DERIVATIVE FINANCIAL INSTRUMENTS

NOTE H. DERIVATIVE FINANCIAL INSTRUMENTS

We have retail and/or 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. 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 the FASB Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging.

Cash Flow Hedges

We enter into foreign currency forward contracts designated as cash flow hedges (to sell Canadian dollars and purchase U.S. dollars) 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 further 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 selling, general and administrative expense, net. Based on the rates in effect as of October 30, 2016, we expect to reclassify a net gain of approximately $322,000 from OCI to cost of goods sold over the next 12 months.

We also enter into non-designated foreign currency forward contracts (to sell Australian dollars and purchase U.S. dollars) 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 selling, general and administrative expense, net.

As of October 30, 2016 and November 1, 2015, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:

 

In thousands      October 30, 2016        November 1, 2015  

Contracts designated as cash flow hedges

    $ 29,000      $ 20,000   

Contracts not designated as cash flow hedges

    $ 46,000       $ 37,000   

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 selling, general and administrative expense, net. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for the thirteen and thirty-nine weeks ended October 30, 2016 and November 1, 2015.

 

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

 

In thousands   

Thirteen

Weeks Ended

October 30, 2016

    

Thirteen

Weeks Ended

November 1, 2015

    

Thirty-nine

Weeks Ended

October 30, 2016

    

Thirty-nine

Weeks Ended

November 1, 2015

  

Net gain (loss) recognized in OCI

    $ 704      $ 158      $ (795 )    $ 729   

Net gain (loss) reclassified from OCI into cost of goods sold

    $ (406 )    $ 339      $ 53      $ 1,250   

Net foreign exchange gain (loss) recognized in selling, general and administrative expense:

         

Instruments designated as cash flow hedges1

    $ (22 )    $ (12 )    $ (12 )    $ (54 ) 

Instruments not designated or de-designated2

    $ (566 )    $ 748      $ (3,599 )    $ 3,153   
                                  
1 Changes in fair value of the forward contract related to interest charges (or forward points).
2 Changes in fair value for instruments not designated as cash flow hedges as well as de-designated instruments.

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 I.

 

In thousands    Balance sheet location        October 30, 2016       November 1, 2015  

Derivatives designated as hedging instruments:

        

Cash flow hedge foreign currency forward contracts

      Other current assets       $ 653      $ 412   

Cash flow hedge foreign currency forward contracts

      Other long-term assets         176        —    

Cash flow hedge foreign currency forward contracts

      Other current liabilities         (328 )      —    
                           

Total, net

       $ 501      $ 412   
                           

Derivatives not designated as hedging instruments:

        

Foreign currency forward contracts

      Other current assets       $ 314      $ 541   
                           

Total, net

       $ 314      $ 541   
                           

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.