Derivative Financial Instruments

12 Months Ended

Jan. 31, 2021

Note L: 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 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 financial 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 (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

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 January 31, 2021, we expect to reclassify a net

pre-tax

loss of approximately

$979,000 from OCI to cost of goods sold over the next 12 months.

As of January 31, 2021, and February 2, 2020, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:



In thousands	Jan. 31, 2021		Feb. 2, 2020
Contracts designated as cash flow hedges	$	28,300	$	17,200

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 fiscal 2020, fiscal 2019 and fiscal 2018.

The effect of derivative instruments in our Consolidated Financial Statements,

pre-tax,

was as follows:


	Fiscal 2020				Fiscal 2019				Fiscal 2018

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
Line items presented in the Consolidated Statement s of Earnings in which the effects of derivatives are recorded	$	4,146,920	$	1,725,572	$	3,758,916	$	1,673,218	$	3,570,580	$	1,665,060
Gain (loss) recognized in income
Derivatives designated as cash flow hedges	$	562	$	—	$	604	$	—	$	478	$	57
Derivatives not designated as hedging instruments	$	—	$	17	$	—	$	28	$	—	$	3,967

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



In thousands	Fiscal 2020			Fiscal 2019
Derivatives designated as cash flow hedges:
Other current assets	$	113		$	138
Other current liabilities	$	(692	)	$	—

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.