Derivative Financial Instruments

3 Months Ended

May 03, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Consistent with our risk management guidelines, we hedge a portion of our transactions related to merchandise purchases for foreign operations and certain intercompany transactions using foreign exchange forward contracts. The principal currencies hedged against changes in the U.S. dollar are British pounds, Canadian dollars, Euro, and Japanese yen. We do not enter into derivative financial contracts for trading purposes. Cash flows from derivative financial instruments are classified as cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows.

Cash Flow Hedges

We designate the following foreign exchange forward contracts as cash flow hedges: (1) forward contracts used to hedge forecasted merchandise purchases and related costs denominated primarily in U.S. dollars made by our international subsidiaries whose functional currencies are their local currencies; (2) forward contracts used to hedge forecasted intercompany royalty payments denominated in foreign currencies received by entities whose functional currencies are U.S. dollars; and (3) forward contracts used to hedge forecasted intercompany revenue transactions related to merchandise sold from our regional purchasing entity, whose functional currency is the U.S. dollar, to certain international subsidiaries in their local currencies of British pounds and Euro. The foreign exchange forward contracts entered into to hedge forecasted merchandise purchases and related costs, intercompany royalty payments, and intercompany revenue transactions generally have terms of up to 18 months.

There were no material amounts recorded in the Condensed Consolidated Statements of Income for the thirteen weeks endedMay 3, 2014 or May 4, 2013 as a result of hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or the discontinuance of cash flow hedges because the forecasted transactions were no longer probable.

Net Investment Hedges

We also use foreign exchange forward contracts to hedge the net assets of international subsidiaries to offset the foreign currency translation and economic exposures related to our investment in the subsidiaries.

There were no material amounts recorded in the Condensed Consolidated Statements of Income for the thirteen weeks endedMay 3, 2014 or May 4, 2013 as a result of hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or the discontinuance of net investment hedges.

Other Derivatives Not Designated as Hedging Instruments

We use foreign exchange forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations for certain intercompany balances denominated in currencies other than the functional currency of the entity with the intercompany balance. The gain or loss on the derivative financial instruments, as well as the remeasurement impact of the underlying intercompany balances, is recorded in operating expenses in the Condensed Consolidated Statements of Income in the same period and generally offset. We generally enter into foreign exchange forward contracts as needed to hedge intercompany balances that bear foreign exchange risk.

Outstanding Notional Amounts

We had foreign exchange forward contracts outstanding in the following notional amounts:

(notional amounts in millions)	May 3, 2014		February 1, 2014		May 4, 2013
U.S. dollars (1)	$	1,583	$	1,309	$	1,284
Canadian dollars	C$	8	C$	8	C$	—
Euro	€	26	€	25	€	26
Japanese yen	¥	—	¥	—	¥	2,275

__________ 

(1) The principal currencies hedged against changes in the U.S. dollar were British pounds, Canadian dollars, Euro, and Japanese yen.

Contingent Features

We had no derivative financial instruments with credit-risk-related contingent features underlying the agreements as of May 3, 2014, February 1, 2014, or May 4, 2013.

Quantitative Disclosures about Derivative Financial Instruments

The fair values of foreign exchange forward contracts are as follows:

($ in millions)	May 3, 2014		February 1, 2014		May 4, 2013
Derivatives designated as cash flow hedges:
Other current assets	$	37	$	48	$	51
Other long-term assets	$	4	$	6	$	11
Accrued expenses and other current liabilities	$	16	$	13	$	5
Lease incentives and other long-term liabilities	$	4	$	1	$	2
Derivatives designated as net investment hedges:
Other current assets	$	—	$	1	$	1
Other long-term assets	$	—	$	—	$	—
Accrued expenses and other current liabilities	$	—	$	—	$	—
Lease incentives and other long-term liabilities	$	—	$	—	$	—
Derivatives not designated as hedging instruments:
Other current assets	$	3	$	9	$	6
Other long-term assets	$	—	$	—	$	—
Accrued expenses and other current liabilities	$	2	$	1	$	2
Lease incentives and other long-term liabilities	$	—	$	—	$	—
Total derivatives in an asset position	$	44	$	64	$	69
Total derivatives in a liability position	$	22	$	15	$	9

Substantially all of the unrealized gains and losses from designated cash flow hedges as of May 3, 2014 will be recognized in income within the next 12 months at the then-current values, which may differ from the fair values as of May 3, 2014 shown above.

Our foreign exchange forward contracts are subject to master netting arrangements with each of our counterparties and such arrangements are enforceable in the event of default or early termination of the contract. We do not elect to offset the fair values of our derivative financial instruments in the Condensed Consolidated Balance Sheets, and as such, the fair values shown above represent gross amounts. The amounts subject to enforceable master netting arrangements are $1 million, $1 million, and $4 million as of May 3, 2014, February 1, 2014, and May 4, 2013, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would be $43 million, $63 million, and $65 million and the net amounts of the derivative financial instruments in a liability position would be $21 million, $14 million, and $5 million as of May 3, 2014, February 1, 2014, and May 4, 2013, respectively.

See Note 5 of Notes to Condensed Consolidated Financial Statements for disclosures on the fair value measurements of our derivative financial instruments.

The effective portion of gains and losses on foreign exchange forward contracts in cash flow hedging and net investment hedging relationships recorded in other comprehensive income and the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:

	13 Weeks Ended
($ in millions)	May 3, 2014			May 4, 2013
Derivatives in cash flow hedging relationships:
Gain (loss) recognized in other comprehensive income	$	(15	)	$	36
Gain reclassified into cost of goods sold and occupancy expenses	$	7		$	12
Gain reclassified into operating expenses	$	1		$	2
Derivatives in net investment hedging relationships:
Gain (loss) recognized in other comprehensive income	$	(1	)	$	1

For the thirteen weeks endedMay 3, 2014 and May 4, 2013, there were no amounts of gain or loss reclassified from accumulated other comprehensive income into income for derivative financial instruments in net investment hedging relationships, as we did not sell or liquidate (or substantially liquidate) any of our hedged subsidiaries during the periods.

There were no material gains or losses on foreign exchange forward contracts not designated as hedging instruments that were recorded in operating expenses in the Condensed Consolidated Statements of Income, on a pre-tax basis for the thirteen weeks endedMay 3, 2014 and May 4, 2013.