Derivative Financial Instruments

12 Months Ended

Feb. 01, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 Canadian dollar, Japanese yen, British pound, Mexican peso, Euro, Chinese yuan, and Taiwan dollar.

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 entity, 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.

Net Investment Hedges

We may 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 these subsidiaries.

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 that represent economic hedges, as well as the remeasurement of the underlying intercompany balances, is recorded in operating expenses on the Consolidated Statements of Income in the same period and generally offset each other.

Outstanding Notional Amounts

As of February 1, 2020 and February 2, 2019, we had foreign exchange forward contracts outstanding in the following notional amounts:



($ in millions)	February 1, 2020		February 2, 2019
Derivatives designated as cash flow hedges	$	501	$	774
Derivatives not designated as hedging instruments	689		660
Total	$	1,190	$	1,434

Quantitative Disclosures about Derivative Financial Instruments

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



($ in millions)	February 1, 2020		February 2, 2019
Derivatives designated as cash flow hedges:
Other current assets	$	6	$	15
Accrued expenses and other current liabilities	2		3

Derivatives not designated as hedging instruments:
Other current assets	4		5
Accrued expenses and other current liabilities	8		8

Total derivatives in an asset position	$	10	$	20
Total derivatives in a liability position	$	10	$	11

All of the unrealized gains and losses from designated cash flow hedges as of February 1, 2020 will be recognized in income within the next 12 months at the then-current values, which may differ from the fair values as of February 1, 2020 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 on the Consolidated Balance Sheets and as such the fair values shown above represent gross amounts. The amounts subject to enforceable master netting arrangements are not material as of February 1, 2020 and February 2, 2019.

See Note 7 of Notes to 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 designated in a cash flow hedging relationship and net investment hedging relationships recorded in OCI, on a pre-tax basis, are as follows:



	Fiscal Year
($ in millions)	2019		2018		2017
Derivatives in cash flow hedging relationships:
Gain (loss) recognized in other comprehensive income	$	18	$	50	$	(60	)
Derivatives in net investment hedging relationships:
Loss recognized in other comprehensive income	$	—	$	—	$	(1	)

The pre-tax amounts recognized in income related to derivative instruments are as follows:



	Location and Amount of (Gain) Loss Recognized in Income
	Fiscal Year 2019						Fiscal Year 2018						Fiscal Year 2017
($ in millions)	Cost of goods sold and occupancy expenses			Operating expenses			Cost of goods sold and occupancy expenses			Operating expenses			Cost of goods sold and occupancy expenses		Operating expenses
Total amount of expense line items presented on the Consolidated Statements of Income in which the effects of derivatives are recorded	$	10,250		$	5,559		$	10,258		$	4,960		$	9,789	$	4,587

(Gain) loss recognized in income:
Derivatives designated as cash flow hedges	$	(29	)	$	—		$	(13	)	$	(1	)	$	—	$	1
Derivatives not designated as hedging instruments	—			(4		)	—			(33		)	—		29
Total (gain) loss recognized in income	$	(29	)	$	(4	)	$	(13	)	$	(34	)	$	—	$	30

For fiscal 2019, 2018, and 2017, there were no amounts of gain or loss reclassified from accumulated OCI 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.