Annual report pursuant to Section 13 and 15(d)

DERIVATIVE FINANCIAL INSTRUMENTS

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DERIVATIVE FINANCIAL INSTRUMENTS
12 Months Ended
Feb. 03, 2018
DERIVATIVE FINANCIAL INSTRUMENTS  
DERIVATIVE FINANCIAL INSTRUMENTS

16.    DERIVATIVE FINANCIAL INSTRUMENTS

As discussed in Note 6, in January 2015, we entered into an interest rate swap agreement on an initial notional amount of $520.0 million that matures in August 2018 with periodic interest settlements.  At February 3, 2018, the notional amount totaled $70.0 million.  Under this interest rate swap agreement, we receive a floating rate based on the 3‑month LIBOR rate and pay a fixed rate of 5.03% (including the applicable margin of 3.50%) on the outstanding notional amount. We have designated the interest rate swap as a cash flow hedge of the variability of interest payments under the Term Loan due to changes in the LIBOR benchmark interest rate.

In addition, in April 2017, we entered into an interest rate swap agreement on an initial notional amount of $260.0 million that matures in June 2021 with periodic interest rate settlements.  At February 3, 2018, the notional amount totaled $340.0 million.  Under this interest rate swap agreement, we receive a floating rate based on the 1‑month LIBOR rate and pay a fixed rate of 5.56% (including the applicable margin of 3.50%) on the outstanding notional amount. We have designated the interest rate swap as a cash flow hedge of the variability of interest payments under the Term Loan due to changes in the LIBOR benchmark interest rate.

At February 3, 2018, the fair value of the interest rate swaps was a net asset of $3.7 million with $3.8 million recorded in other assets and $0.1 recorded in current assets, offset by $0.2 million recorded in accrued expenses and other current liabilities in our consolidated balance sheet.  At January 28, 2017, the fair value of the interest rate swap was a liability of $1.1 million recorded in accrued expenses and other current liabilities in our consolidated balance sheet.  The effective portion of the swaps is reported as a component of accumulated other comprehensive (loss) income. There was no hedge ineffectiveness at February 3, 2018 and January 28, 2017. Changes in fair value are reclassified from accumulated other comprehensive (loss) income into earnings in the same period that the hedged item affects earnings.

Over the next 12 months, as interest payments are made, approximately $0.1 million of the effective portion of the interest rate swaps is expected to be reclassified from accumulated other comprehensive (loss) income into earnings within interest expense.  If, at any time, either interest rate swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as a gain or loss in the statement of earnings for the applicable period.

Also, we have entered into derivative instruments to hedge our foreign exchange risk, specifically related to the British pound and Euro, primarily related to merchandise purchase commitments that are denominated in a currency different from the functional currency of the operating entity.  We have designated these instruments as cash flow hedges of the variability in exchange rates for those foreign currencies.  These cash flow hedges mature at various dates through December 2019.  At February 3, 2018, the fair value of these cash flow hedges was a net liability of $1.7 million with $1.9 million in accrued expenses and other current liabilities offset by $0.2 million recorded in other current assets in our consolidated balance sheet. At January 28, 2017, the fair value of these cash flow hedges was a net liability of $0.8 million with $1.2 million in accrued expenses and other current liabilities offset by $0.4 million recorded in other current assets in our consolidated balance sheet. The effective portion of the hedges is reported as a component of accumulated other comprehensive (loss) income. Hedge ineffectiveness at February 3, 2018 and January 28, 2017 was immaterial.  Changes in fair value are reclassified from accumulated other comprehensive (loss) income into earnings in the same period that the hedged item affects earnings. Over the next 12 months, based on our estimate of when the underlying inventory is sold, $2.4 million of the effective portion of the cash flow hedges is expected to be reclassified from accumulated other comprehensive (loss) income into earnings within cost of sales. 

Additionally, we are exposed to market risk associated with foreign currency exchange rate fluctuations as a result of our direct sourcing programs and our operations in foreign countries. Our risk management policy is to hedge a portion of forecasted merchandise purchases for our direct sourcing programs and certain intercompany transactions that bear foreign exchange risk using foreign exchange forward contracts. We have elected not to apply hedge accounting to these transactions denominated in a foreign currency. Amounts related to these transactions were immaterial to our consolidated financial statements.

We had no derivative financial instruments with credit-risk-related contingent features underlying the agreements as of February 3, 2018 or January 28, 2017, respectively.