DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Aug. 02, 2020

NOTE H. 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. However, some of our foreign operations have a functional currency other than the U.S. dollar. 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 financial instruments are measured at fair value and recorded in either other current or long-term assets or other current or long-term liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative financial instrument is designated as a hedge and qualifies for hedge accounting in accordance with the 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 Canadian subsidiary. These hedges have terms of up to 18 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 in cost of goods sold. Based on the rates in effect as of August 2, 2020, we expect to reclassify a net

pre-tax

gain of approximately $285,000 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 British pounds 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 or losses related to these contracts are recognized in selling, general and administrative expenses.

As of August 2, 2020 and August 4, 2019, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:


In thousands	August 2, 2020		August 4, 2019
Contracts designated as cash flow hedges	$	6,800	$	6,000

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measurable ineffectiveness of the hedge is recorded in selling, general and administrative expenses. 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

twenty-six

weeks ended August 2, 2020 and August 4, 2019.

The effect of derivative instruments in our Condensed Consolidated Financial Statements during the thirteen and

twenty-six

weeks ended August 2, 2020 and August 4, 2019,

pre-tax,

was as follows:


	Thirteen Weeks Ended								Twenty-six Weeks Ended
	August 2, 2020				August 4, 2019				August 2, 2020				August 4, 2019
In thousands	Cost of goods sold		Selling, general and administrative expenses		Cost of goods sold		Selling, general and administrative expenses		Cost of goods sold		Selling, general and administrative expenses		Cost of goods sold		Selling, general and administrative expenses
Line items presented in the Condensed Consolidated Statement of Earnings in which the effects of derivatives are recorded	$	939,575	$	365,841	$	886,953	$	397,696	$	1,760,518	$	731,456	$	1,683,754	$	767,895
Gain (loss) recognized in income
Derivatives designated as cash flow hedges	$	145	$	—	$	187	$	—	$	195	$	—	$	295	$	—
Derivatives not designated as hedging instruments	$	—	$	—	$	—	$	24	$	—	$	2	$	—	$	18

The fair values of our derivative financial instruments are presented below according to their classification in our Condensed Consolidated Balance Sheets. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note I.


In thousands	August 2, 2020		August 4, 2019
Derivatives designated as cash flow hedges:
Other current assets	$	150	$	142

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.