Derivative Financial Instruments

3 Months Ended

May 04, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

(14) Derivative Financial Instruments

Hedging Strategy

The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company has entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges.

The Company’s primary objective is to hedge the variability in forecasted cash flows due to the foreign currency risk. Various transactions that occur in Canada, Europe and South Korea are denominated in U.S. dollars and British pounds and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar denominated purchases of merchandise and U.S. dollar and British pound intercompany liabilities. In addition, certain operating expenses and tax liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency.The Company enters into derivative financial instruments, including forward exchange contracts, to offset some but not all of the exchange riskon certain of these anticipated foreign currency transactions.

Periodically, the Company may also use foreign currency forward contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries.

The impact of the credit risk of the counterparties to the derivative contracts is considered in determining the fair value of the foreign currency forward contracts. As of May 4, 2013, credit risk has not had a significant effect on the fair value of the Company’s foreign currency contracts.

The Company also has interest rate swap agreements, which are not designated as hedges for accounting purposes, to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s variable rate capital lease obligation, thus reducing the impact of interest rate changes on future interest payment cash flows. Refer to Note 8 for further information. 

Hedge Accounting Policy

U.S. dollar forward contracts are used to hedge forecasted merchandise purchases over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold. The Company also hedges forecasted intercompany royalties over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in other income and expense in the period in which the royalty expense is incurred.

U.S. dollar forward contracts are also used to hedge the net investments of certain of the Company’s international subsidiaries over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are not recognized in income until the sale or liquidation of the hedged net investment.

The Company also has foreign currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign currency contracts not qualifying as cash flow hedges or net investment hedges are reported in net earnings as part of other income and expense.

Summary of Derivative Instruments

The fair value of derivative instruments in the condensed consolidated balance sheet as of May 4, 2013 and February 2, 2013 was as follows (in thousands):

	Derivative Balance Sheet Location	Fair Value at May 4, 2013		Fair Value at Feb 2, 2013
ASSETS:
Derivatives designated as hedging instruments:
Foreign exchange currency contracts:
Cash flow hedges	Other current assets	$	1,940	$	387
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	Other current assets	1,833		971
Total		$	3,773	$	1,358
LIABILITIES:
Derivatives designated as hedging instruments:
Foreign exchange currency contracts:
Cash flow hedges	Current liabilities	$	34	$	2,904
Net investment hedges	Current liabilities	23		—
Total derivatives designated as hedging instruments		57		2,904
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	Current liabilities	29		2,648
Interest rate swaps	Long-term liabilities	737		852
Total derivatives not designated as hedging instruments		766		3,500
Total		$	823	$	6,404

Derivatives Designated As Hedging Instruments

Cash Flow Hedges

During the three months ended May 4, 2013, the Company purchased U.S. dollar forward contracts in Europe totaling US$37.4 millionto hedge forecasted merchandise purchases and intercompany royalties that were designated as cash flow hedges.There were no U.S. dollar forward contracts that were purchased in Canada during the three months ended May 4, 2013. As ofMay 4, 2013, the Company had forward contracts outstanding for its European and Canadian operations of US$117.7 million and US$30.0 million, respectively, which are expected to mature over the next13 months.

The following table summarizes the gains (losses) before taxes recognized on the derivative instruments designated as cash flow hedges in OCI and net earnings for the three months ended May 4, 2013 and April 28, 2012 (in thousands):

	Gain/(Loss) Recognized in OCI					Location of Gain/(Loss) Reclassified from Accumulated OCI into Income (1)	Gain/(Loss) Reclassified from Accumulated OCI into Income
	Three Months Ended May 4, 2013		Three Months Ended Apr 28, 2012				Three Months Ended May 4, 2013			Three Months Ended Apr 28, 2012
Derivatives designated as cash flow hedges:
Foreign exchange currency contracts	$	4,232	$	(823	)	Cost of sales	$	479		$	2,443
Foreign exchange currency contracts	$	438	$	(51	)	Other income/expense	$	(21	)	$	178

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(1) The ineffective portion was immaterial during the three months ended May 4, 2013 and April 28, 2012 and was recorded in net earnings and included in interest income/expense.

As of May 4, 2013, accumulated other comprehensive income included a net unrealized gainof approximately $1.9 million, net of tax, which will be recognized in other income or cost of product sales over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values.

The following table summarizes net after-tax derivative activity recorded in accumulated other comprehensive income (loss) (in thousands):

	Three Months Ended
	May 4, 2013			Apr 28, 2012
Beginning balance gain (loss)	$	(1,782	)	$	4,259
Net gains (losses) from changes in cash flow hedges	4,088			(494		)
Net gains reclassified to income	(388		)	(2,300		)
Ending balance gain	$	1,918		$	1,465

As of February 2, 2013, the Company had forward contracts outstanding for its European and Canadian operations of US$106.9 millionand US$40.3 million, respectively, that were designated as cash flow hedges.

Net Investment Hedges

During the three months ended May 4, 2013, the Company purchased U.S. dollar forward contracts in Europe totaling US$17.9 million to hedge the net investments in certain of the Company’s international subsidiaries that were designated as net investment hedges. As of May 4, 2013, the Company had forward contracts outstanding for its European net investments of US$17.9 millionwhich are expected to mature over the next one month.

The loss recognized in foreign currency translation adjustment component of accumulated other comprehensive income (loss) was immaterial during the three months ended May 4, 2013. There were no amounts that were reclassified into net income during the three months ended May 4, 2013.

As of February 2, 2013 and April 28, 2012, there were no forward contracts that were designated as net investment hedges.

Derivatives Not Designated as Hedging Instruments

As of May 4, 2013, the Company had euro foreign currency contracts to purchase US$122.2 millionexpected to mature over the next 14 months, Canadian dollar foreign currency contracts to purchase US$22.0 millionexpected to mature over the next four months and GBP2.0 million of foreign currency contracts to purchase euros expected to mature over the next four months.

The following table summarizes the gains (losses) before taxes recognized on the derivative instruments not designated as hedging instruments in other income and expense for the three months ended May 4, 2013 and April 28, 2012 (in thousands):

	Location of Gain/(Loss) Recognized in Income	Gain/(Loss) Recognized in Income
		Three Months Ended May 4, 2013		Three Months Ended Apr 28, 2012
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	Other income/expense	$	3,776	$	(2,254	)
Interest rate swaps	Other income/expense	$	78	$	19

As of February 2, 2013, the Company had euro foreign currency contracts to purchase US$90.2 million, Canadian dollar foreign currency contracts to purchase US$39.7 million and GBP4.7 millionof foreign currency contracts to purchase euros.