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Derivatives
 6 Months Ended
Jul. 28, 2012
Derivatives [Abstract]  
DERIVATIVES

14. DERIVATIVES

 

The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivatives, 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.

 

In order to qualify for hedge accounting treatment, a derivative must be considered highly effective at offsetting changes in either the hedged item's cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. Any hedge ineffectiveness is reported in current period earnings and hedge accounting is discontinued if it is determined that the derivative is not highly effective.

 

For derivatives that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative are recognized in earnings. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded as a component of Other Comprehensive Income (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. The ineffective portion of the derivative gain or loss, as well as changes in the fair value of the derivative's time value are recognized in current period earnings. The effectiveness of the hedge is assessed based on changes in the fair value attributable to changes in spot prices. The changes in the fair value of the derivative contract related to the changes in the difference between the spot price and the forward price are excluded from the assessment of hedge effectiveness and are also recognized in current period earnings. If the cash flow hedge relationship is terminated, the derivative gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative gains or losses are immediately recognized in earnings.

 

The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exposure associated with forecasted foreign-currency-denominated intercompany inventory sales to foreign subsidiaries and the related settlement of the foreign-currency-denominated inter-company receivable. Fluctuations in exchange rates will either increase or decrease the Company's U.S. dollar 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. The maximum length of time over which forecasted foreign-currency-denominated inter-company inventory sales are hedged is 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 Income (Loss). Substantially all of the remaining unrealized gains or losses related to foreign-currency-denominated inter-company inventory sales that have occurred as of July 28, 2012 will be recognized in cost of goods sold over the following two months at the values at the date the inventory was sold to the respective subsidiary.

 

The Company nets derivative assets and liabilities on the Consolidated Balance Sheets to the extent that master netting arrangements meet the specific accounting requirements set forth by U.S. GAAP.

 

As of July 28, 2012, the Company had the following outstanding foreign currency exchange forward contracts that were entered to hedge either a portion, or all of, forecasted foreign-currency-denominated inter-company inventory sales, the resulting settlement of the foreign-currency-denominated inter-company accounts receivable, or both:

 Notional Amount(1)
Euro$ 127,060
British Pound$ 65,003
Canadian Dollar$ 11,094
    
(1)Amounts are reported in thousands and in U.S. Dollar equivalent as of July 28, 2012.

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 exchange rates result in transaction gains/(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 instrument and the hedged item.

 

As of July 28, 2012, the Company had the following foreign outstanding currency forward contracts that were entered into to hedge foreign currency denominated net monetary assets/liabilities:

 

 Notional Amount(1)
Swiss Franc$ 10,086
Euro$ 9,820
British Pound$ 6,259
Canadian Dollar$ 3,958
Japanese Yen$ 2,856
    
(1)Amounts are reported in thousands and in U.S. Dollar equivalent as of July 28, 2012.

The location and amounts of derivative fair values on the Consolidated Balance Sheets as of July 28, 2012 and January 28, 2012 were as follows:

    Asset Derivatives    Liability Derivatives 
(in thousands)Balance Sheet Location July 28, 2012 January 28, 2012 Balance Sheet Location July 28, 2012 January 28, 2012 
Derivatives Designated as Hedging Instruments:                
Foreign Currency Exchange Forward ContractsOther Current Assets $ 11,810 $ 10,766 Other Liabilities $ 58 $ 874 
                 
Derivates Not Designated as Hedging Instruments:                
Foreign Currency Exchange Forward ContractsOther Current Assets $ 367 $ 4 Other Liabilities $ 96 $ 584 
                 
TotalOther Current Assets $ 12,177 $ 10,770 Other Liabilities $ 154 $ 1,458 
                 

Refer to Note 7, “Fair Value,” for further discussion of the determination of the fair value of derivatives.

 

The location and amounts of derivative gains and losses for the twenty-six weeks ended July 28, 2012 and July 30, 2011 on the Consolidated Statements of Operations and Comprehensive Income were as follows:

     Thirteen Weeks Ended  Twenty-Six Weeks Ended 
     July 28, 2012  July 30, 2011  July 28, 2012  July 30, 2011 
(in thousands) Location  Gain/(Loss)  Gain/(Loss)  Gain/(Loss)  Gain/(Loss) 
Derivatives not designated as Hedging Instruments:               
Foreign Exchange Forward Contracts Other Operating (Income) Expense, Net $ 3,617 $ (209) $ 4,457 $ (1,717) 
                

                      
                      
                      
 Amount of Gain (Loss) Recognized in OCI on Derivative Contracts (Effective Portion) Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) Amount of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)Location of Gain (Loss) Recognized in Earnings on Derivative Contracts (Ineffective Portion and Amount Excluded from Effectiveness Testing)Amount of Gain (Loss) Recognized in Earnings on Derivative Contracts (Ineffective Portion and Amount Excluded from Effectiveness Testing) 
 (a)  (b)  (c) 
  Thirteen Weeks Ended 
(in thousands) July 28, 2012  July 30, 2011    July 28, 2012  July 30, 2011   July 28, 2012  July 30, 2011 
Derivatives in Cash Flow Hedging Relationships                     
Foreign Currency Exchange Forward Contracts$ 13,939 $ 3,195 Cost of Goods Sold $ 3,984 $ (1,248) Other Operating (Income) Expense, Net$ (98) $ (426) 
                      
                      
                      
        
 Amount of Gain (Loss) Recognized in OCI on Derivative Contracts (Effective Portion) Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) Amount of Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)Location of Gain (Loss) Recognized in Earnings on Derivative Contracts (Ineffective Portion and Amount Excluded from Effectiveness Testing)Amount of Gain (Loss) Recognized in Earnings on Derivative Contracts (Ineffective Portion and Amount Excluded from Effectiveness Testing) 
 (a)  (b)  (c) 
                      
  Twenty-Six Weeks Ended 
(in thousands) July 28, 2012  July 30, 2011    July 28, 2012  July 30, 2011   July 28, 2012  July 30, 2011 
Derivatives in Cash Flow Hedging Relationships                     
Foreign Exchange Forward Contracts$ 10,713 $ (2,102) Cost of Goods Sold $ 8,839 $ (1,392) Other Operating (Income) Expense, Net$ (212) $ (499) 
                      
                      
(a)The amount represents the change in fair value of derivative contracts due to changes in spot rates.
(b)The amount represents reclassification from OCI into earnings that occurs when the hedged item affects earnings, which is when merchandise is sold to the Company's customers.
(c)The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and, therefore, recognized in earnings.