Derivative Financial Instruments

9 Months Ended

Oct. 29, 2011

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

Note 6. Derivative Financial Instruments

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to hedge a significant portion of forecasted merchandise purchases for foreign operations, forecasted intercompany royalty payments, and intercompany obligations that bear foreign exchange risk using foreign exchange forward contracts. The principal currencies hedged against changes in the U.S. dollar are British pounds, Japanese yen, and Canadian dollars. 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 denominated primarily in U.S. dollars made by our international subsidiaries whose functional currencies are their local currencies; and (2) forward contracts used to hedge forecasted intercompany royalty payments denominated in Japanese yen and Canadian dollars received by entities whose functional currencies are U.S. dollars. We enter into foreign exchange forward contracts to hedge forecasted merchandise purchases and related costs generally occurring in 12 to 18 months. We make intercompany royalty payments on a quarterly basis, and we enter into foreign exchange forward contracts to hedge intercompany royalty payments generally occurring in 9 to 15 months.

During the thirteen weeks ended April 30, 2011, we entered into and settled treasury rate lock agreements in anticipation of issuing our 5.95 percent fixed-rate Notes of $1.25 billion in April 2011. Prior to the issuance of our Notes, we were subject to changes in interest rates, and we therefore locked into fixed-rate coupons to hedge against the interest rate fluctuations. The gain related to the treasury lock agreements is reported as a component of OCI and is recognized in income over the life of the Notes.

There were no material amounts recorded in the Condensed Consolidated Statements of Income for the thirteen and thirty-nine weeks ended October 29, 2011 or October 30, 2010 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 amounts recorded in the Condensed Consolidated Statements of Income for the thirteen and thirty-nine weeks ended October 29, 2011 or October 30, 2010 as a result of hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or the discontinuance of net investment hedges.

Not Designated as Hedging Instruments

In addition, 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 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. These foreign exchange forward contracts generally settle in less than 12 months.

Outstanding Notional Amounts

As of October 29, 2011, January 29, 2011, and October 30, 2010, we had foreign exchange forward contracts outstanding to sell various currencies related to our forecasted merchandise purchases and forecasted intercompany royalty payments and to buy the following notional amounts:

(notional amounts in millions)	October 29,     2011		January 29, 2011		October 30,     2010
U.S. dollars (1)	$	995	$	1,025	$	1,053
British pounds	£	40	£	54	£	49

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

As of October 29, 2011, January 29, 2011, and October 30, 2010, we had foreign exchange forward contracts outstanding to hedge the net assets of our Japanese subsidiary in the following notional amounts:

(notional amounts in millions)	October 29,     2011		January 29, 2011		October 30,     2010
Japanese yen	¥	3,000	¥	3,000	¥	—

As of October 29, 2011, January 29, 2011, and October 30, 2010, we had foreign exchange forward contracts outstanding to buy the following currencies related to our intercompany balances that bear foreign exchange risk:

(notional amounts in millions)	October 29,     2011		January 29, 2011		October 30,     2010
U.S. dollars	$	47	$	12	$	20
British pounds	£	1	£	—	£	—
Japanese yen	¥	3,238	¥	3,238	¥	3,238

Contingent Features

We had no derivative financial instruments with credit-risk-related contingent features underlying the agreements as of October 29, 2011, January 29, 2011, or October 30, 2010.

Quantitative Disclosures about Derivative Financial Instruments

The fair values of asset and liability derivative financial instruments are as follows:

	October 29, 2011
	Asset Derivatives			Liability Derivatives
($ in millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as cash flow hedges:
Foreign exchange forward contracts	Other current assets	$	3	Accrued expenses and other current liabilities	$	24
Foreign exchange forward contracts	Other long-term assets		1	Lease incentives and other long-term liabilities		4
Total derivatives designated as cash flow hedges			4			28
Derivatives designated as net investment hedges:
Foreign exchange forward contracts	Other current assets		1	Accrued expenses and other current liabilities		2
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		—
Total derivatives designated as net investment hedges			1			2
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Other current assets		2	Accrued expenses and other current liabilities		7
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		—
Total derivatives not designated as hedging instruments			2			7
Total derivative instruments		$	7		$	37

	January 29, 2011
	Asset Derivatives			Liability Derivatives
($ in millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as cash flow hedges:
Foreign exchange forward contracts	Other current assets	$	—	Accrued expenses and other current liabilities	$	30
Foreign exchange forward contracts	Other long-term assets		2	Lease incentives and other long-term liabilities		2
Total derivatives designated as cash flow hedges			2			32
Derivatives designated as net investment hedges:
Foreign exchange forward contracts	Other current assets		—	Accrued expenses and other current liabilities		—
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		—
Total derivatives designated as net investment hedges			—			—
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Other current assets		2	Accrued expenses and other current liabilities		5
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		—
Total derivatives not designated as hedging instruments			2			5
Total derivative instruments		$	4		$	37
	October 30, 2010
	Asset Derivatives			Liability Derivatives
($ in millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as cash flow hedges:
Foreign exchange forward contracts	Other current assets	$	2	Accrued expenses and other current liabilities	$	38
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		11
Total derivatives designated as cash flow hedges			2			49
Derivatives designated as net investment hedges:
Foreign exchange forward contracts	Other current assets		—	Accrued expenses and other current liabilities		—
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		—
Total derivatives designated as net investment hedges			—			—
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Other current assets		2	Accrued expenses and other current liabilities		7
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		—
Total derivatives not designated as hedging instruments			2			7
Total derivative instruments		$	4		$	56

Substantially all of the unrealized gains and losses from designated cash flow hedges as of October 29, 2011 will be recognized in income within the next 12 months at the then current values, which may differ from the fair values as of October 29, 2011 shown above.

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

The effects of derivative financial instruments on OCI and the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:

	Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)
	13 Weeks Ended					39 Weeks Ended
($ in millions)	October 29, 2011		October 30, 2010			October 29, 2011			October 30, 2010
Derivatives in cash flow hedging relationships:
Foreign exchange forward contracts	$	16	$	(37	)	$	(38	)	$	(57	)
Treasury rate lock agreements		—		—			1			—
	$	16	$	(37	)	$	(37	)	$	(57	)

	Amount and Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	13 Weeks Ended						39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Derivatives in cash flow hedging relationships:
Foreign exchange forward contracts - Cost of goods sold and occupancy expenses	$	(16	)	$	(7	)	$	(37	)	$	(22	)
Foreign exchange forward contracts - Operating expenses		(1	)		(2	)		(4	)		(3	)
	$	(17	)	$	(9	)	$	(41	)	$	(25	)

	Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)
	13 Weeks Ended					39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010		October 29, 2011			October 30, 2010
Derivatives in net investment hedging relationships:
Foreign exchange forward contracts	$	(1	)	$	—	$	(3	)	$	(5	)

	Amount and Location of Gain (Loss) Recognized in Income on Derivatives
	13 Weeks Ended					39 Weeks Ended
($ in millions)	October 29, 2011		October 30, 2010			October 29, 2011		October 30, 2010
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts - Operating expenses	$	6	$	(2	)	$	4	$	5

For the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 2010, 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.

See Note 9 of Notes to Condensed Consolidated Financial Statements for components of OCI, which includes changes in fair value of derivative financial instruments, net of tax, and reclassification adjustments for realized gains and losses on derivative financial instruments, net of tax.