Derivative Financial Instruments

6 Months Ended

Jul. 30, 2016

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. We use derivative financial instruments to manage our exposure to foreign currency exchange rate risk and do not enter into derivative financial contracts for trading purposes. 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. These contracts are entered into with large, reputable financial institutions that are monitored for counterparty risk. The currencies hedged against changes in the U.S. dollar are Japanese yen, Canadian dollars, British pounds, Euro, Mexican pesos, Hong Kong dollars, Chinese yuan, and Taiwan dollars. 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 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 entities, whose functional currency is the U.S. dollar, to certain international subsidiaries in their local currencies. 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 24 months. The effective portion of the gain or loss on the derivative financial instruments is reported as a component of other comprehensive income and is recognized in income in the period in which the underlying transaction impacts the income statement.

There were no material amounts recorded in the Condensed Consolidated Statements of Income for the thirteen and twenty-six weeks endedJuly 30, 2016 or August 1, 2015 as a result of our analysis of hedge ineffectiveness or hedge components excluded from the assessment of effectiveness. There were no material amounts reclassified into earnings during the thirteen and twenty-six weeks endedJuly 30, 2016 or August 1, 2015 as a result of 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 and twenty-six weeks endedJuly 30, 2016 or August 1, 2015 as a result of our analysis of hedge ineffectiveness or hedge components excluded from the assessment of effectiveness.

Other Derivatives Not Designated as Hedging Instruments

We enter into 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 that represent economic hedges, 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.

Outstanding Notional Amounts

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

($ in millions)	July 30, 2016		January 30, 2016		August 1, 2015
Derivatives designated as cash flow hedges	$	1,449	$	1,220	$	1,468
Derivatives designated as net investment hedges	32		30		31
Derivatives not designated as hedging instruments	625		324		313
Total	$	2,106	$	1,574	$	1,812

Quantitative Disclosures about Derivative Financial Instruments

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

($ in millions)	July 30, 2016		January 30, 2016		August 1, 2015
Derivatives designated as cash flow hedges:
Other current assets	$	30	$	71	$	95
Other long-term assets	$	8	$	8	$	29
Accrued expenses and other current liabilities	$	38	$	1	$	3
Lease incentives and other long-term liabilities	$	23	$	1	$	4
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	$	12	$	13	$	17
Other long-term assets	$	1	$	—	$	—
Accrued expenses and other current liabilities	$	19	$	1	$	1
Lease incentives and other long-term liabilities	$	3	$	—	$	—
Total derivatives in an asset position	$	52	$	93	$	141
Total derivatives in a liability position	$	83	$	3	$	8

The majority of the unrealized gains and losses from designated cash flow hedges as of July 30, 2016 will be recognized in income within the next 12 months at the then-current values, which may differ from the fair values as of July 30, 2016 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 $11 million, $2 million, and $5 million as of July 30, 2016, January 30, 2016, and August 1, 2015, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would be $41 million, $91 million, and $136 million and the net amounts of the derivative financial instruments in a liability position would be $72 million, $1 million, and $3 million as of July 30, 2016, January 30, 2016 and August 1, 2015, 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					26 Weeks Ended
($ in millions)	July 30, 2016			August 1, 2015		July 30, 2016			August 1, 2015
Derivatives in cash flow hedging relationships:
Gain (loss) recognized in other comprehensive income	$	20		$	53	$	(105	)	$	39
Gain reclassified into cost of goods sold and occupancy expenses	$	—		$	26	$	13		$	54
Gain (loss) reclassified into operating expenses	$	(6	)	$	1	$	(8	)	$	3
Derivatives in net investment hedging relationships:
Gain (loss) recognized in other comprehensive income	$	1		$	2	$	(2	)	$	1

For the thirteen and twenty-six weeks endedJuly 30, 2016 and August 1, 2015, there were no amounts of gain or loss reclassified from accumulated other comprehensive income into net 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.

Gains and losses on foreign exchange forward contracts not designated as hedging instruments recorded in the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:

	13 Weeks Ended				26 Weeks Ended
($ in millions)	July 30, 2016		August 1, 2015		July 30, 2016			August 1, 2015
Gain (loss) recognized in operating expenses	$	10	$	—	$	(17	)	$	—