Derivative Financial Instruments | 3 Months Ended |
3-May-14 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ' |
Derivative Financial Instruments | ' |
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 primarily in Europe, Canada 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 denominated 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 risk on 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 3, 2014, 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 9 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 earnings 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 designated as hedging instruments 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 sheets as of May 3, 2014 and February 1, 2014 was as follows (in thousands): |
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| | Derivative | | Fair Value at May 3, | | Fair Value at Feb 1, | | | | | | | |
Balance Sheet | 2014 | 2014 | | | | | | | |
Location | | | | | | | | | |
ASSETS: | | | | | | | | | | | | | | | |
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Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | |
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Foreign exchange currency contracts: | | | | | | | | | | | | | |
Cash flow hedges | | Other current assets | | $ | 41 | | | $ | 977 | | | | | | | | |
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Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | |
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Foreign exchange currency contracts | | Other current assets | | — | | | 1,139 | | | | | | | | |
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Total | | | | $ | 41 | | | $ | 2,116 | | | | | | | | |
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LIABILITIES: | | | | | | | | | | | | | | | |
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Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | |
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Foreign exchange currency contracts: | | | | | | | | | | | | | |
Cash flow hedges | | Accrued expenses | | $ | 1,756 | | | $ | 672 | | | | | | | | |
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Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | |
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Foreign exchange currency contracts | | Accrued expenses | | 2,589 | | | 1,040 | | | | | | | | |
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Interest rate swaps | | Other long-term liabilities | | 515 | | | 581 | | | | | | | | |
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Total derivatives not designated as hedging instruments | | | | 3,104 | | | 1,621 | | | | | | | | |
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Total | | | | $ | 4,860 | | | $ | 2,293 | | | | | | | | |
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Derivatives Designated As Hedging Instruments |
Cash Flow Hedges |
During the three months ended May 3, 2014, the Company purchased U.S. dollar forward contracts in Canada and Europe totaling US$36.4 million and US$26.0 million, respectively, that were designated as cash flow hedges. As of May 3, 2014, the Company had forward contracts outstanding for its European and Canadian operations of US$92.1 million and US$40.6 million, respectively, to hedge forecasted merchandise purchases and intercompany royalties, which are expected to mature over the next 14 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 (loss) for the three months ended May 3, 2014 and May 4, 2013 (in thousands): |
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| Gain (Loss) | | Location of | | Gain (Loss) |
Recognized in | Gain (Loss) | Reclassified from |
OCI | Reclassified from | Accumulated OCI into |
| Accumulated OCI | Earnings (Loss) |
| Three Months Ended | | Three Months | | into Earnings (Loss)(1) | | Three Months Ended | | Three Months |
3-May-14 | Ended | | 3-May-14 | Ended |
| 4-May-13 | | | 4-May-13 |
Derivatives designated as cash flow hedges: | | | | | | | | | | | | | |
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Foreign exchange currency contracts | $ | (2,572 | ) | | $ | 4,232 | | | Cost of sales | | $ | (494 | ) | | $ | 479 | |
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Foreign exchange currency contracts | $ | (107 | ) | | $ | 438 | | | Other income/expense | | $ | (31 | ) | | $ | (21 | ) |
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-1 | The ineffective portion was immaterial during the three months ended May 3, 2014 and May 4, 2013 and was recorded in net earnings (loss) and included in interest income/expense. | | | | | | | | | | | | | | | | |
As of May 3, 2014, accumulated other comprehensive loss included a net unrealized loss of approximately $1.7 million, net of tax, which will be recognized in cost of product sales or other expense 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): |
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| Three Months Ended | | | | | | | | | | |
| May 3, | | May 4, | | | | | | | | | | |
2014 | 2013 | | | | | | | | | | |
Beginning balance loss | $ | (113 | ) | | $ | (1,782 | ) | | | | | | | | | | |
Net gains (losses) from changes in cash flow hedges | (2,058 | ) | | 4,088 | | | | | | | | | | | |
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Net (gains) losses reclassified to earnings (loss) | 504 | | | (388 | ) | | | | | | | | | | |
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Ending balance gain (loss) | $ | (1,667 | ) | | $ | 1,918 | | | | | | | | | | | |
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At February 1, 2014, the Company had forward contracts outstanding for its European and Canadian operations of US$87.1 million and US$15.2 million, respectively, that were designated as cash flow hedges. |
Derivatives Not Designated as Hedging Instruments |
As of May 3, 2014, the Company had euro foreign currency contracts to purchase US$104.0 million expected to mature over the next 11 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 3, 2014 and May 4, 2013 (in thousands): |
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| Location of | | Gain (Loss) | | | | | | | | |
Gain (Loss) | Recognized in Earnings (Loss) | | | | | | | | |
Recognized in | | | | | | | | | |
| Earnings (Loss) | | Three Months Ended | | Three Months | | | | | | | | |
| 3-May-14 | Ended | | | | | | | | |
| | 4-May-13 | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | |
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Foreign exchange currency contracts | Other income/expense | | $ | (2,789 | ) | | $ | 3,776 | | | | | | | | | |
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Interest rate swaps | Other income/expense | | $ | 75 | | | $ | 78 | | | | | | | | | |
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At February 1, 2014, the Company had euro foreign currency contracts to purchase US$111.8 million and Canadian dollar foreign currency contracts to purchase US$13.8 million. |