Derivative Financial Instruments

6 Months Ended

Aug. 03, 2013

Derivative Financial Instruments

4. Derivative Financial Instruments

We enter into forward foreign exchange contracts with respect to certain purchases in United States dollars of inventory to be sold in our retail stores in Canada. The purpose of these contracts is to protect our margins on the eventual sale of the inventory from fluctuations in the exchange rate for Canadian and United States dollars. The term of these forward exchange contracts is generally less than one year. These contracts are treated as cash-flow hedges. Amounts reported in accumulated other comprehensive income (loss) related to these forward foreign exchange contracts will be reclassified to cost of goods sold over an approximately three-month period. We also enter into forward foreign exchange contracts with respect to short-term intercompany balances between U.S. and foreign entities in Canada and Australia. The purpose of these contracts is to protect us from fluctuations in the exchange rates upon the settlement of such balances. These contracts are not designated as hedges. Consequently, changes in the fair value of these contracts are included in other income.

We use interest rate caps to hedge against rising interest rates associated with our Term Loan (see Note 7) above the strike rate of the cap through December 23, 2016, the maturity date of the caps. The interest rate caps were designated on the date of execution as cash-flow hedges. In December 2010, we paid approximately $12.1 million to enter into these interest rate caps. This premium, and any related amounts reported in accumulated other comprehensive loss, are being amortized to interest expense through December 23, 2016, as interest payments are made on the underlying Term Loan. During the 13 week period ended August 3, 2013 and July 28, 2012, we reclassified approximately $0.2 million and $0.1 million respectively, from accumulated other comprehensive loss to interest expense. During the 26 week period ended August 3, 2013 and July 28, 2012, we reclassified approximately $0.4 million and $0.1 million respectively, from accumulated other comprehensive loss to interest expense. We estimate that approximately $1.6 million will be reclassified from accumulated other comprehensive loss to interest expense within the next 12 months.

For a derivative instrument designated as a cash-flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (loss) and is subsequently recognized in earnings when the hedged exposure is recognized in earnings. Gains or losses on the derivative representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in earnings.

We had the following outstanding derivatives designated as cash-flow hedges (in thousands):

	August 3, 2013				February 2, 2013				July 28, 2012
	Number of Instruments		Notional (USD)		Number of Instruments		Notional (USD)		Number of Instruments		Notional (USD)
Interest rate derivatives
Purchased Caps		4	$	700,000		4	$	700,000		4	$	700,000
Foreign exchange derivatives
Forward foreign exchange contracts		6		7,165		6		6,377		6		7,684
Total		10	$	707,165		10	$	706,377		10	$	707,684

In addition to the cash flow hedges above, as of August 3, 2013 and February 2, 2013, the Company had one forward foreign exchange contract with a notional amount of $0.3 million and $1.0 million, respectively, which was not designated as a hedge. As of July 28, 2012, all forward foreign exchange contracts were designated as a hedge.

The table below presents the fair value of all of our derivative financial instruments as well as their classification on the condensed consolidated balance sheets (in thousands).

	August 3, 2013				February 2, 2013				July 28, 2012
	Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities
Other Assets
Purchased Interest Rate Caps	$	1,187	$	—	$	964	$	—	$	1,087	$	—
Forward foreign exchange contracts		223		—		—		—		—		—
Accrued Liabilities
Forward foreign exchange contracts		—		—		—		18		—		14
Total	$	1,410	$	—	$	964	$	18	$	1,087	$	14

The tables below present the effect of all of our derivative financial instruments on the condensed consolidated statements of operations and comprehensive income (loss) for the 13 and 26 weeks ended August 3, 2013 and July 28, 2012 (in thousands). No amounts were reclassified from accumulated other comprehensive loss into income as a result of forecasted transactions that failed to occur or as a result of hedge ineffectiveness for either period.

	13 Weeks Ended August 3, 2013
	Gains / (Losses) Recognized in OCI on Derivative (Effective Portion)			Location of Gains (Losses) Reclassified from Accumulated OCI into Income (Effective Portion)	Gains / (Losses) Reclassified from Accumulated OCI into Income (Effective Portion)
Interest rate caps	$	679		Interest expense	$	(249	)
Forward foreign exchange contracts		312		Cost of goods sold		60
Total	$	991			$	(189	)
	13 Weeks Ended July 28, 2012
	Gains / (Losses) Recognized in OCI on Derivative (Effective Portion)			Location of Gains (Losses) Reclassified from Accumulated OCI into Income (Effective Portion)	Gains / (Losses) Reclassified from Accumulated OCI into Income (Effective Portion)
Interest rate caps	$	(958	)	Interest expense	$	(61	)
Forward foreign exchange contracts		335		Cost of goods sold		6
Total	$	(623	)		$	(55	)
	26 Weeks Ended August 3, 2013
	Gains / (Losses) Recognized in OCI on Derivative (Effective Portion)			Location of Gains (Losses) Reclassified from Accumulated OCI into Income (Effective Portion)	Gains / (Losses) Reclassified from Accumulated OCI into Income (Effective Portion)
Interest rate caps	$	223		Interest expense	$	(432	)
Forward foreign exchange contracts		404		Cost of goods sold		53
Total	$	627			$	(379	)
	26 Weeks Ended July 28, 2012
	Gains / (Losses) Recognized in OCI on Derivative (Effective Portion)			Location of Gains (Losses) Reclassified from Accumulated OCI into Income (Effective Portion)	Gains / (Losses) Reclassified from Accumulated OCI into Income (Effective Portion)
Interest rate caps	$	(274	)	Interest expense	$	(114	)
Forward foreign exchange contracts		84		Cost of goods sold		88
Total	$	(190	)		$	(26	)

In the tables above, the amounts of gain (loss) recognized in OCI for the effective portion of our interest rate caps and forward foreign exchange contracts for the 13 weeks ended July 28, 2012 have been corrected from the previously disclosed amounts of ($897) and $88, respectively. These corrections had no impact on the accompanying condensed consolidated balance sheet or statements of operations and comprehensive income (loss).

The amounts of gain (loss) recognized in OCI for the effective portion of our interest rate caps and forward foreign exchange contracts for the 26 weeks ended July 28, 2012 have been corrected from the previously disclosed amounts of ($160) and $71, respectively. These corrections had no impact on the accompanying condensed consolidated balance sheet or statements of operations and comprehensive income (loss).