Derivative Instruments

3 Months Ended

May 02, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.

The Company uses derivative instruments, primarily foreign currency exchange forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign currency denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign currency denominated intercompany receivables. Fluctuations in foreign currency exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These foreign currency exchange forward contracts typically have a maximum term of twelve months. The sale of the inventory to the Company’s customers will result in the reclassification of related derivative gains and losses that are reported in accumulated other comprehensive loss (“AOCL”) into earnings.

The Company also uses foreign currency exchange forward contracts to hedge certain foreign–currency–denominated net monetary assets/liabilities. Examples of monetary assets/liabilities include cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains or losses being recorded in earnings, as U.S. GAAP requires that monetary assets/liabilities be remeasured at the spot exchange rate at quarter–end or upon settlement. The Company has chosen not to

apply hedge accounting to these instruments because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items.

The Company did not have any outstanding foreign currency exchange forward contracts as of May 2, 2020. The location and amounts of derivative fair values of foreign currency exchange forward contracts on the Condensed Consolidated Balance Sheet as of February 1, 2020 were as follows:



(in thousands)	Location	February 1, 2020		Location	February 1, 2020
Derivatives designated as cash flow hedging instruments	Other current assets	$	1,869	Accrued expenses	$	1,377
Derivatives not designated as hedging instruments	Other current assets	100		Accrued expenses	83
Total		$	1,969		$	1,460

The fair value of derivative instruments is valued using quoted market prices of the same or similar instruments, adjusted for counterparty risk.

As a result of COVID–19, there was a significant change in the expected timing of previously hedged intercompany sales transactions, resulting in a dedesignation of the related hedge instruments. At the time of dedesignation of these hedges, they were in a net gain position of approximately $12.6 million. Due to the extenuating circumstances leading to dedesignation, gains associated with these hedges at the time of dedesignation are deferred in AOCL until being reclassified into cost of goods sold, exclusive of depreciation and amortization when the originally forecasted transactions occur and the hedged items affect earnings. During the thirteen weeks ended May 2, 2020 and subsequent to the dedesignation of these hedges, these hedge contracts were settled.

Information pertaining to derivative gains or losses from foreign currency exchange forward contracts designated as cash flow hedging instruments for the thirteen weeks ended May 2, 2020 and May 4, 2019 follows:



	Thirteen Weeks Ended
(in thousands)	May 2, 2020		May 4, 2019
Gain recognized in AOCL ⁽¹⁾	$	12,235	$	2,263
Gain reclassified from AOCL into cost of sales, exclusive of depreciation and amortization ⁽²⁾	$	3,370	$	2,541


⁽¹⁾	Amount represents the change in fair value of derivative contracts.


⁽²⁾	Amount represents gain reclassified from accumulated other comprehensive loss to cost of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Loss when the hedged item affects earnings, which is when merchandise is converted to cost of sales, exclusive of depreciation and amortization.

Substantially all of the unrealized gain will be recognized in costs of sales, exclusive of depreciation and amortization, on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) over the next twelve months.

Additional information pertaining to derivative gains or losses from foreign currency exchange forward contracts not designated as hedging instruments for the thirteen weeks ended May 2, 2020 and May 4, 2019 follows:



	Thirteen Weeks Ended
(in thousands)	May 2, 2020		May 4, 2019
Gain recognized in other operating loss (income), net	$	742	$	275