Derivative Financial Instruments

6 Months Ended

Aug. 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, and Taiwan dollar. Cash flows from derivative financial instruments are classified as cash flows from operating activities on 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 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. 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 into net income (loss) during the period in which the underlying transaction impacts the Condensed Consolidated Statements of Operations.

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 impact of the underlying intercompany balances, is recorded in operating expenses on the Condensed Consolidated Statements of Operations in the same period and generally offset each other.

Outstanding Notional Amounts

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



($ in millions)	August 1, 2020		February 1, 2020		August 3, 2019
Derivatives designated as cash flow hedges	$	214	$	501	$	652
Derivatives not designated as hedging instruments	727		689		1,046
Total	$	941	$	1,190	$	1,698

Quantitative Disclosures about Derivative Financial Instruments

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



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

Derivatives not designated as hedging instruments:
Other current assets	3		4		11
Accrued expenses and other current liabilities	18		8		7

Total derivatives in an asset position	$	6	$	10	$	27
Total derivatives in a liability position	$	19	$	10	$	9

All of the unrealized gains and losses from designated cash flow hedges as of August 1, 2020 will be recognized into net income (loss) within the next twelve months at the then-current values, which may differ from the fair values as of August 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 Condensed Consolidated Balance Sheets, and as such, the fair values shown above represent gross amounts. The amounts subject to enforceable master netting arrangements were not material as of August 1, 2020, February 1, 2020, and August 3, 2019, respectively.

See Note 4 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 designated in a cash flow hedging relationship recorded in other comprehensive income, on a pre-tax basis, are as follows:



	13 Weeks Ended					26 Weeks Ended
($ in millions)	August 1, 2020			August 3, 2019		August 1, 2020		August 3, 2019
Gain (loss) recognized in other comprehensive income	$	(9	)	$	2	$	12	$	15

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



	Location and Amount of (Gain) Loss Recognized in Net Income (Loss)
	13 Weeks Ended August 1, 2020					13 Weeks Ended August 3, 2019
($ in millions)	Cost of goods sold and occupancy expense			Operating expenses		Cost of goods sold and occupancy expense			Operating expenses
Total amount of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of derivatives are recorded	$	2,126		$	1,076	$	2,449		$	1,274

(Gain) loss recognized in net income (loss)
Derivatives designated as cash flow hedges	(7		)	—		(6		)	—
Derivatives not designated as hedging instruments	—			32		—			(3		)
Total (gain) loss recognized in net income (loss)	$	(7	)	$	32	$	(6	)	$	(3	)



	Location and Amount of Gain Recognized in Net Income (Loss)
	26 Weeks Ended August 1, 2020						26 Weeks Ended August 3, 2019
($ in millions)	Cost of goods sold and occupancy expense			Operating expenses			Cost of goods sold and occupancy expense			Operating expenses
Total amount of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of derivatives are recorded	$	3,965		$	2,588		$	4,811		$	2,302

Gain recognized in net income (loss)
Derivatives designated as cash flow hedges	(11		)	—			(12		)	—
Derivatives not designated as hedging instruments	—			(11		)	—			(12		)
Total gain recognized in net income (loss)	$	(11	)	$	(11	)	$	(12	)	$	(12	)