Financial Instruments and Risk Management

12 Months Ended

Jan. 30, 2016

Financial Instruments and Risk Management [Abstract]

Financial Instruments and Risk Management

19. Financial Instruments and Risk Management

The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third-party and intercompany forecasted transactions. As a result of the use of derivative instruments, the Company is 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 only with major financial institutions selected based upon their credit ratings and other financial factors. The Company monitors the creditworthiness of counterparties throughout the duration of the derivative instrument.

Additional information is contained within Note 20, Fair Value Measurements.

Derivative Holdings Designated as Hedges

For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as its 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. No such gains or losses were recognized in earnings for any of the periods presented. 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 management evaluates periodically.

The primary currencies to which the Company is exposed are the euro, British pound, Canadian dollar, and Australian dollar. For the most part, merchandise inventories are purchased by each geographic area in their respective local currency. The exception to this is 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 Accumulated Other Comprehensive Loss (“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. As of January 30, 2016, all of the Company’s hedged forecasted transactions are less than twelve months, and the Company expects all derivative-related amounts reported in AOCL to be reclassified to earnings within twelve months. During 2015, the net change in the fair value of the foreign exchange derivative financial instruments designated as cash flow hedges of the purchase of inventory resulted in a gain of $5 million and therefore decreased AOCL, this resulted in a gain of $2 million included in AOCL as of January 30, 2016.

The notional value of the contracts outstanding at January 30, 2016 was $72 million and these contracts mature at various dates through January 2017.

Derivative Holdings Not Designated as Hedges

The Company enters into foreign exchange forward contracts that are not designated as hedges in order to manage the costs of foreign currency-denominated merchandise purchases and intercompany transactions. Changes in the fair value of these foreign exchange forward contracts are recorded in earnings immediately within selling, general and administrative expenses. The net change in fair value was $1 million in 2015, was not significant for 2014, and was $1million for 2013. The notional value of the contracts outstanding at January 30, 2016 was $13 million, and these contracts mature at various dates through March 2016.

The Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign currency-denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are not designated as hedges, are recorded in earnings immediately within other income.  The realized gains, premiums paid, and changes in the fair market value recorded were not significant for 2015, and was $1 million for 2014. There were no contracts outstanding at January 30, 2016.

Additionally, the Company enters into diesel fuel forward and option contracts to mitigate a portion of the Company’s freight expense due to the variability caused by fuel surcharges imposed by our third-party freight carriers. Changes in the fair value of these contracts are recorded in earnings immediately. The effect was not significant for any of the periods presented. The notional value of the diesel fuel forward contracts outstanding at January 30, 2016 was $1million and these contracts mature at various dates through May 2016.

Fair Value of Derivative Contracts

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

	Balance Sheet
($ in millions)	Caption	2015		2014
Hedging Instruments:
Foreign exchange forward contracts	Current assets	$	3	$	—
Foreign exchange forward contracts	Current liabilities	$	—	$	4
Non-hedging Instruments:
Foreign exchange forward contracts	Current liabilities	$	—	$	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 January 30, 2016:

	Contract Value		Weighted-Average
	($ in millions)		Exchange Rate
Inventory
Buy €/Sell British £	$	72	0.7359
Intercompany
Buy €/Sell British £	$	11	0.7298
Buy US/Sell CAD	$	2	1.4080
Diesel fuel forwards	$	1	—

Business Risk

The retailing business is highly competitive. Price, quality, selection of merchandise, reputation, store location, advertising, and customer service are important competitive factors in the Company’s business. The Company operates in 23 countries and purchased approximately 90 percent of its merchandise in 2015 from its top 5 suppliers. In 2015, the Company purchased approximately 72 percent of its athletic merchandise from one major supplier, Nike, Inc. (“Nike”), and approximately 11 percent from another major supplier. Each of our operating divisions is highly dependent on Nike; they individually purchased 55 to 82 percent of their merchandise from Nike.  

Included in the Company’s Consolidated Balance Sheet at January 30, 2016, are the net assets of the Company’s European operations, which total $904 million and are located in 19 countries, 11 of which have adopted the euro as their functional currency.