Derivative Financial Instruments

9 Months Ended

Oct. 29, 2011

Derivative Financial Instruments

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 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, British pounds or Swiss francs 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 sales, 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 manage exchange risk on certain of these anticipated foreign currency transactions. The Company does not hedge all transactions denominated in foreign currency.

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 October 29, 2011, credit risk did not have 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 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 within stockholders’ equity, and are recognized in other income and expense in the period in which the royalty expense is incurred.

The Company also has foreign currency contracts that are not designated as hedges for accounting purposes.  Changes in fair value of foreign currency contracts not qualifying as cash flow 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 October 29, 2011 and January 29, 2011 was as follows (in thousands):

	Derivative Balance Sheet Location	Fair Value at Oct. 29, 2011		Fair Value at Jan. 29, 2011
ASSETS:
Derivatives designated as hedging instruments:
Foreign exchange currency contracts	Other current assets	$	896	$	1,137
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	Other current assets	1,137		2,090
Total		$	2,033	$	3,227
LIABILITIES:
Derivatives designated as hedging instruments:
Foreign exchange currency contracts	Current liabilities	$	1,041	$	1,598
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	Current liabilities	2,237		6,168
Interest rate swaps	Long-term liabilities	954		868
Total derivatives not designated as hedging instruments		3,191		7,036
Total		$	4,232	$	8,634

Forward Contracts Designated as Cash Flow Hedges

During the nine months ended October 29, 2011, the Company purchased U.S. dollar forward contracts in Europe and Canada totaling US$95.9 million and US$39.0 million, respectively, to hedge forecasted merchandise purchases and intercompany royalties that were designated as cash flow hedges.  As of October 29, 2011, the Company had forward contracts outstanding for its European and Canadian operations of US$80.2 million and US$51.1 million, respectively, which are expected to mature over the next 11 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 and nine months ended October 29, 2011 and October 30, 2010 (in thousands):

	Gain/(Loss) Recognized in OCI					Location of Gain/(Loss)	Gain/(Loss) Reclassified from Accumulated OCI into Income/(Loss)
	Three Months Ended Oct. 29, 2011		Three Months Ended Oct. 30, 2010			Reclassified from Accumulated OCI into Income (1)	Three Months Ended Oct. 29, 2011			Three Months Ended Oct. 30, 2010
Derivatives designated as hedging instruments:
Foreign exchange currency contracts	$	3,970	$	(3,570	)	Cost of sales	$	(3,470	)	$	3,475
Foreign exchange currency contracts	$	26	$	(41	)	Other income/expense	$	(20	)	$	258

	Gain/(Loss) Recognized in OCI						Location of Gain/(Loss)	Gain/(Loss) Reclassified from Accumulated OCI into Income/(Loss)
	Nine Months Ended Oct. 29, 2011			Nine Months Ended Oct. 30, 2010			Reclassified from Accumulated OCI into Income (1)	Nine Months Ended Oct. 29, 2011			Nine Months Ended Oct. 30, 2010
Derivatives designated as hedging instruments:
Foreign exchange currency contracts	$	(3,239	)	$	(2,563	)	Cost of sales	$	(6,540	)	$	2,795
Foreign exchange currency contracts	$	(585	)	$	636		Other income/expense	$	(9	)	$	1,240

(1) The ineffective portion was immaterial during the three and nine months ended October 29, 2011 and October 30, 2010 and was recorded in net earnings and included in other income/expense.

As of October 29, 2011, accumulated other comprehensive income included an unrealized gain of approximately US$0.5 million, net of tax, of which less than US$0.1 million 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 (in thousands):

	Three Months Ended						Nine Months Ended
	Oct. 29, 2011			Oct. 30, 2010			Oct. 29, 2011			Oct. 30, 2010
Beginning balance (loss) gain	$	(5,619	)	$	2,902		$	(1,789	)	$	1,845
Net gains (losses) from changes in cash flow hedges	3,059			(3,178		)	(3,366		)	(1,623		)
Net losses (gains) reclassified to income	3,027			(3,321		)	5,622			(3,819		)
Ending balance gain (loss)	$	467		$	(3,597	)	$	467		$	(3,597	)

As of January 29, 2011, the Company had forward contracts outstanding for its European and Canadian operations of US$71.6 million and US$52.3 million, respectively.

Forward Contracts Not Designated as Cash Flow Hedges

As of October 29, 2011, the Company had euro foreign currency contracts to purchase US$102.1 million expected to mature over the next six months, Canadian dollar foreign currency contracts to purchase US$47.2 million expected to mature over the next nine months, Swiss franc foreign currency contracts to purchase US$18.0 million expected to mature over the next 11 months and GBP0.3 million of foreign currency contracts to purchase euros expected to mature over the next one month.

The following table summarizes the gains (losses) before taxes recognized on the derivative instruments not designated as cash flow hedges in other income and expense for the three and nine months ended October 29, 2011 and October 30, 2010 (in thousands):

	Location of	Gain/(Loss) Recognized in Income						Gain/(Loss) Recognized in Income
	Gain/(Loss) Recognized in Income	Three Months Ended Oct. 29, 2011			Three Months Ended Oct. 30, 2010			Nine Months Ended Oct. 29, 2011			Nine Months Ended Oct. 30, 2010
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts	Other income/expense	$	6,401		$	(3,938	)	$	(6,005	)	$	(102	)
Interest rate swaps	Other income/expense	$	(89	)	$	130		$	(89	)	$	(37	)

As of January 29, 2011, the Company had euro foreign currency contracts to purchase US$70.0 million, Canadian dollar foreign currency contracts to purchase US$67.7 million, Swiss franc foreign currency contracts to purchase US$30.1 million and GBP11.3 million of foreign currency contracts to purchase euros.