Financial Instruments and Risk Management

12 Months Ended

Feb. 01, 2020

Financial Instruments and Risk Management [Abstract]

Financial Instruments and Risk Management

18. Financial Instruments and Risk Management

We operate internationally and utilize certain derivative financial instruments to mitigate our foreign currency exposures, primarily related to third-party and intercompany forecasted transactions. As a result of the use of derivative instruments, we are exposed to the risk that counterparties will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a practice of entering into contracts with major financial institutions selected based upon their credit ratings and other financial factors. We monitor the creditworthiness of counterparties throughout the duration of the derivative instrument.

Derivative Holdings Designated as Hedges

For a derivative to qualify as a hedge at inception and throughout the hedged period, we formally document the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as our risk-management objectives, strategies for undertaking the various hedge transactions, and the methods of assessing hedge effectiveness and ineffectiveness. In addition, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative instrument would be recognized in earnings immediately. Gains or losses recognized in earnings for any of the periods presented were not significant. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period, which we evaluate periodically.

The primary currencies to which we are exposed are the euro, British pound, Canadian dollar, and Australian dollar. Generally, merchandise inventories are purchased by each geographic area in their respective local currency with the exception of the United Kingdom, whose merchandise inventory purchases are denominated in euros.

For option and foreign exchange forward contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of AOCL and is recognized as a component of cost of sales when the related inventory is sold. The amount reclassified to cost of sales related to such contracts was not significant for any of the periods presented. The effective portion of gains or losses associated with other forward contracts is deferred as a component of AOCL until the underlying transaction is reported in earnings. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings was not significant for any of the periods presented. When using a forward contract as a hedging instrument, the Company excludes the time value of the contract from the assessment of effectiveness.

The notional value of the contracts outstanding at February 1, 2020 and February 2, 2019 was $92 million and $117 million, respectively. As of February 1, 2020, all of our hedged forecasted transactions extend less than twelve months into the future, and we expect all derivative-related amounts reported in AOCL to be reclassified to earnings within twelve months. The balance in AOCL as of February 1, 2020 was a loss of $3 million and as of February 2, 2019 it was not significant.

Derivative Holdings Not Designated as Hedges

We enter into certain derivative contracts that are not designated as hedges, such as foreign exchange forward contracts and currency option contracts. These derivative contracts are used to manage certain costs of foreign currency-denominated merchandise purchases, intercompany transactions, and the effect of fluctuating foreign exchange rates on the reporting of foreign currency-denominated earnings. Changes in the fair value of derivative holdings not designated as hedges, as well as realized gains and premiums paid, are recorded in earnings immediately within SG&A or Other income, net, depending on the type of transaction. The aggregate amount recognized for these contracts was not significant for any of the periods presented.

The notional value of foreign exchange forward contracts outstanding at February 1, 2020 and February 2, 2019 was $1 million and $11 million, respectively. The foreign exchange forward contracts outstanding at February 1, 2020 matured during February 2020.

Fair Value of Derivative Contracts

The following represents the fair value of our derivative contracts. Many of our agreements allow for a netting arrangement. The following is presented on a gross basis, by type of contract:

	Balance Sheet	February 1,		February 2,
($ in millions)	Caption	2020		2019
Hedging Instruments:
Foreign exchange forward contracts	Current liabilities	$	4	$	1

Notional Values and Foreign Currency Exchange Rates

The table below presents the notional amounts for all outstanding derivatives and the weighted-average exchange rates of foreign exchange forward contracts at February 1, 2020:

		Contract Value	Weighted-Average
		($ in millions)	Exchange Rate
Inventory
Buy €/Sell British £	$	92	0.8847
Intercompany
Buy US $/Sell CAD $	$	1	1.3167

Business Risk

The retailing business is highly competitive. Price, quality, selection of merchandise, reputation, store location, advertising, and customer experience are important competitive factors in the Company’s business. We operate in 27 countries and purchased approximately 91 percent of our merchandise in 2019 from our top 5 suppliers. In 2019, we purchased approximately 71 percent of our athletic merchandise from one major supplier, Nike, Inc. (“Nike”). Each of our operating divisions is highly dependent on Nike; they individually purchased 43 to 77 percent of their merchandise from Nike.

Included in our Consolidated Balance Sheet at February 1, 2020, are the net assets of the Company’s European operations, which total $487 million and are located in 20 countries, 11 of which have adopted the euro as their functional currency.