GES-2014.11.01-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q 

x          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended November 1, 2014
OR 
o                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to           
Commission file number: 1-11893
GUESS?, INC.
(Exact name of registrant as specified in its charter)
Delaware
95-3679695
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
1444 South Alameda Street
 
Los Angeles, California
90021
(Address of principal executive offices)
(Zip Code)
(213) 765-3100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
 
 
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
As of December 4, 2014 the registrant had 85,229,533 shares of Common Stock, $.01 par value per share, outstanding.
 


Table of Contents

GUESS?, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) 
 
Nov 1,
2014
 
Feb 1,
2014
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
374,875

 
$
502,945

Short-term investments

 
5,123

Accounts receivable, net
236,053

 
276,565

Inventories
412,573

 
350,899

Other current assets
114,928

 
80,554

Total current assets
1,138,429

 
1,216,086

Property and equipment, net
290,434

 
324,606

Goodwill
36,757

 
38,992

Other intangible assets, net
11,114

 
13,143

Long-term deferred tax assets
55,531

 
54,973

Other assets
121,831

 
116,631

 
$
1,654,096

 
$
1,764,431

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of capital lease obligations and borrowings
$
1,707

 
$
4,160

Accounts payable
174,557

 
191,532

Accrued expenses
140,410

 
174,333

Total current liabilities
316,674

 
370,025

Capital lease obligations and other long-term debt
6,738

 
7,580

Deferred rent and lease incentives
88,003

 
90,492

Other long-term liabilities
110,847

 
120,518

 
522,262

 
588,615

Redeemable noncontrolling interests
4,895

 
5,830

 
 
 
 
Commitments and contingencies (Note 12)


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock, $.01 par value. Authorized 10,000,000 shares; no shares issued and outstanding

 

Common stock, $.01 par value. Authorized 150,000,000 shares; issued 139,471,241 and 139,245,729 shares, outstanding 85,224,872 and 84,962,345 shares, at November 1, 2014 and February 1, 2014, respectively
853

 
850

Paid-in capital
451,097

 
439,742

Retained earnings
1,230,804

 
1,247,180

Accumulated other comprehensive loss
(52,776
)
 
(13,801
)
Treasury stock, 54,246,369 and 54,283,384 shares at November 1, 2014 and February 1, 2014, respectively
(519,103
)
 
(519,457
)
Guess?, Inc. stockholders’ equity
1,110,875

 
1,154,514

Nonredeemable noncontrolling interests
16,064

 
15,472

Total stockholders’ equity
1,126,939

 
1,169,986

 
$
1,654,096

 
$
1,764,431

 
See accompanying notes to condensed consolidated financial statements.

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GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
Nov 1,
2014
 
Nov 2,
2013
 
Nov 1,
2014
 
Nov 2,
2013
Product sales
$
557,862

 
$
581,081

 
$
1,636,569

 
$
1,711,639

Net royalties
31,972

 
32,416

 
84,377

 
89,784

Net revenue
589,834

 
613,497

 
1,720,946

 
1,801,423

Cost of product sales
375,876

 
385,270

 
1,113,980

 
1,127,238

Gross profit
213,958

 
228,227

 
606,966

 
674,185

Selling, general and administrative expenses
189,093

 
178,379

 
554,220

 
543,766

Restructuring charges

 
1,889

 

 
10,355

Earnings from operations
24,865

 
47,959

 
52,746

 
120,064

Other income (expense):
 

 
 

 
 
 
 
Interest expense
(596
)
 
(428
)
 
(1,893
)
 
(1,342
)
Interest income
351

 
803

 
1,076

 
1,612

Other income, net
7,484

 
3,624

 
11,131

 
8,942

 
7,239

 
3,999

 
10,314

 
9,212

 
 
 
 
 
 
 
 
Earnings before income tax expense
32,104

 
51,958

 
63,060

 
129,276

Income tax expense
10,594

 
17,147

 
21,465

 
42,662

Net earnings
21,510

 
34,811

 
41,595

 
86,614

Net earnings attributable to noncontrolling interests
722

 
791

 
954

 
2,812

Net earnings attributable to Guess?, Inc.
$
20,788

 
$
34,020

 
$
40,641

 
$
83,802

 
 
 
 
 
 
 
 
Net earnings per common share attributable to common stockholders (Note 2):
 

 
 

 
 

 
 

Basic
$
0.24

 
$
0.40

 
$
0.48

 
$
0.99

Diluted
$
0.24

 
$
0.40

 
$
0.47

 
$
0.98

 
 
 
 
 
 
 
 
Weighted average common shares outstanding attributable to common stockholders (Note 2):
 

 
 

 
 
 
 
Basic
84,624

 
84,149

 
84,565

 
84,270

Diluted
84,832

 
84,417

 
84,789

 
84,512

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.225

 
$
0.200

 
$
0.675

 
$
0.600


See accompanying notes to condensed consolidated financial statements.


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GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
Nov 1,
2014
 
Nov 2,
2013
 
Nov 1,
2014
 
Nov 2,
2013
Net earnings
$
21,510

 
$
34,811

 
$
41,595

 
$
86,614

Other comprehensive income (loss) (“OCI”):
 

 
 

 
 
 
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
Gains (losses) arising during the period
(47,100
)
 
11,409

 
(44,558
)
 
(10,615
)
 Reclassification to net earnings for losses realized

 
180

 

 
180

Derivative financial instruments designated as cash flow hedges
 

 
 

 
 
 
 
Gains (losses) arising during the period
4,356

 
(711
)
 
3,544

 
4,186

Less income tax effect
(551
)
 
54

 
(445
)
 
(691
)
 Reclassification to net earnings for (gains) losses realized
800

 
(1,348
)
 
1,615

 
(2,314
)
Less income tax effect
(87
)
 
262

 
283

 
416

Marketable securities
 

 
 

 
 
 
 
Gains (losses) arising during the period
(13
)
 
41

 
(79
)
 
8

Less income tax effect
5

 
(16
)
 
30

 
(5
)
 Reclassification to net earnings for gains realized

 

 
(87
)
 

Less income tax effect

 

 
33

 

Supplemental Executive Retirement Plan (“SERP”)
 

 
 

 
 
 
 
Plan amendment

 

 

 
4,529

Less income tax effect

 

 

 
(1,733
)
Actuarial loss amortization
234

 
277

 
703

 
831

Prior service (credit) cost amortization
(58
)
 
(58
)
 
(174
)
 
253

Less income tax effect
(67
)
 
(84
)
 
(202
)
 
(414
)
Total comprehensive income (loss)
(20,971
)
 
44,817

 
2,258

 
81,245

Less comprehensive income attributable to noncontrolling interests:
 

 
 

 
 
 
 
Net earnings
722

 
791

 
954

 
2,812

Foreign currency translation adjustment
(479
)
 
(317
)
 
(362
)
 
(526
)
Amounts attributable to noncontrolling interests
243

 
474

 
592

 
2,286

Comprehensive income (loss) attributable to Guess?, Inc.
$
(21,214
)
 
$
44,343

 
$
1,666

 
$
78,959


See accompanying notes to condensed consolidated financial statements.


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GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended
 
Nov 1,
2014
 
Nov 2,
2013
Cash flows from operating activities:
 

 
 

Net earnings
$
41,595

 
$
86,614

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization of property and equipment
61,870

 
63,684

Amortization of intangible assets
2,332

 
1,893

Share-based compensation expense
11,374

 
9,844

Unrealized forward contract (gains) losses
(5,267
)
 
257

Net loss on disposition of property and equipment and long-term assets
16,825

 
8,353

Other items, net
384

 
(1,519
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
30,000

 
55,684

Inventories
(73,709
)
 
(57,797
)
Prepaid expenses and other assets
(6,822
)
 
7,529

Accounts payable and accrued expenses
(72,154
)
 
(32,600
)
Deferred rent and lease incentives
(1,827
)
 
(2,804
)
Other long-term liabilities
(9,485
)
 
(1,849
)
Net cash provided by (used in) operating activities
(4,884
)
 
137,289

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(53,208
)
 
(55,432
)
Changes in other assets
261

 
6,638

Proceeds from maturity and sale of investments
5,598

 
1,826

Acquisition of businesses, net of cash acquired
(887
)
 
(653
)
Net cash settlement of forward contracts
181

 
1,838

Net cash used in investing activities
(48,055
)
 
(45,783
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
1,256

 
2,466

Repayment of borrowings and capital lease obligations
(4,022
)
 
(1,040
)
Dividends paid
(57,652
)
 
(51,109
)
Noncontrolling interest capital contributions

 
521

Issuance of common stock, net of nonvested award repurchases
703

 
3,960

Excess tax benefits from share-based compensation
181

 
339

Purchase of treasury stock

 
(22,099
)
Net cash used in financing activities
(59,534
)
 
(66,962
)
Effect of exchange rates on cash and cash equivalents
(15,597
)
 
(3,433
)
Net change in cash and cash equivalents
(128,070
)
 
21,111

Cash and cash equivalents at beginning of period
502,945

 
329,021

Cash and cash equivalents at end of period
$
374,875

 
$
350,132

 
 
 
 
Supplemental cash flow data:
 

 
 

Interest paid
$
1,205

 
$
876

Income taxes paid
$
62,000

 
$
71,971

 
See accompanying notes to condensed consolidated financial statements.

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GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 1, 2014
(unaudited) 
(1)
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Guess?, Inc. and its subsidiaries (the “Company”) contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheets as of November 1, 2014 and February 1, 2014, the condensed consolidated statements of income and comprehensive income (loss) for the three and nine months ended November 1, 2014 and November 2, 2013, and the condensed consolidated statements of cash flows for the nine months ended November 1, 2014 and November 2, 2013. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three and nine months ended November 1, 2014 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended February 1, 2014.
The three and nine months ended November 1, 2014 had the same number of days as the three and nine months ended November 2, 2013. All references herein to “fiscal 2015,” “fiscal 2014” and “fiscal 2013” represent the results of the 52-week fiscal year ending January 31, 2015, the 52-week fiscal year ended February 1, 2014 and the 53-week fiscal year ended February 2, 2013, respectively. 
New Accounting Guidance
In July 2013, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance which requires that an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar loss or a tax credit carryforward, if specific criteria are met. The Company adopted this guidance effective February 2, 2014. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
In April 2014, the FASB issued authoritative guidance which raises the threshold for disposals to qualify as discontinued operations. Under this new guidance, a discontinued operation is (1) a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on an entity’s operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date. This guidance also requires expanded or new disclosures for discontinued operations, individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following disposal and retained equity method investments in a discontinued operation. This guidance is effective for fiscal periods beginning after December 15, 2014. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective

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adoption. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In August 2014, the FASB issued authoritative guidance that requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and requires additional disclosures if certain criteria are met. This guidance is effective for fiscal periods ending after December 15, 2016, with early adoption permitted. The adoption of this guidance is not expected to impact the Company’s consolidated financial statements or related disclosures.
(2)
Earnings Per Share
Basic earnings per share represents net earnings attributable to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share represents net earnings attributable to common stockholders divided by the weighted average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. However, nonvested restricted stock awards (referred to as participating securities) are excluded from the dilutive impact of common equivalent shares outstanding in accordance with authoritative guidance under the two-class method since the nonvested restricted stockholders are entitled to participate in dividends declared on common stock as if the shares were fully vested and hence are deemed to be participating securities. Under the two-class method, earnings attributable to nonvested restricted stockholders are excluded from net earnings attributable to common stockholders for purposes of calculating basic and diluted earnings per common share. However, net losses are not allocated to nonvested restricted stockholders since they are not contractually obligated to share in the losses of the Company.
The computation of basic and diluted net earnings per common share attributable to common stockholders is as follows (in thousands, except per share data):
 
Three Months Ended
 
Nine Months Ended
 
Nov 1, 2014
 
Nov 2, 2013
 
Nov 1, 2014
 
Nov 2, 2013
Net earnings attributable to Guess?, Inc.
$
20,788

 
$
34,020

 
$
40,641

 
$
83,802

Less net earnings attributable to nonvested restricted stockholders
135

 
290

 
415

 
696

Net earnings attributable to common stockholders
$
20,653

 
$
33,730

 
$
40,226

 
$
83,106

 
 
 
 
 
 
 
 
Weighted average common shares used in basic computations
84,624

 
84,149

 
84,565

 
84,270

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options and restricted stock units
208

 
268

 
224

 
242

Weighted average common shares used in diluted computations
84,832

 
84,417

 
84,789

 
84,512

 
 
 
 
 
 
 
 
Net earnings per common share attributable to common stockholders:
 

 
 

 
 
 
 
Basic
$
0.24

 
$
0.40

 
$
0.48

 
$
0.99

Diluted
$
0.24

 
$
0.40

 
$
0.47

 
$
0.98

For the three months ended November 1, 2014 and November 2, 2013, equity awards granted for 1,633,245 and 1,037,751, respectively, of the Company’s common shares and for the nine months ended November 1, 2014 and November 2, 2013, equity awards granted for 1,558,532 and 1,421,685, respectively, of the Company’s common shares were outstanding but were excluded from the computation of diluted weighted average common shares and common share equivalents outstanding because the assumed proceeds, as calculated under the treasury stock method, resulted in these awards being antidilutive. For the three and nine months ended November 1, 2014, the Company also excluded 259,700 nonvested stock units which are subject to the achievement of performance-based vesting conditions from the computation of diluted weighted average common shares and common share equivalents outstanding because the performance condition had not yet been achieved as of November 1, 2014. For the three and nine months ended November 2, 2013, the Company excluded 243,700 nonvested stock units which were subject to the achievement of performance-based vesting conditions from the computation of diluted

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weighted average common shares and common share equivalents outstanding because the performance condition had not yet been achieved as of November 2, 2013.
On March 14, 2011, the Company’s Board of Directors authorized a program to repurchase, from time-to-time and as market and business conditions warrant, up to $250 million of the Company’s common stock (the “2011 Share Repurchase Program”). On June 26, 2012, the Company’s Board of Directors authorized a new program to repurchase, from time-to-time and as market and business conditions warrant, up to $500 million of the Company’s common stock (the “2012 Share Repurchase Program”). The 2012 Share Repurchase Program was in addition to the 2011 Share Repurchase Program. Repurchases under programs may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under programs and programs may be discontinued at any time, without prior notice. There were no share repurchases under the 2012 Share Repurchase Program during the three and nine months ended November 1, 2014. During the nine months ended November 2, 2013, the Company repurchased a total of 882,551 shares under the 2011 and 2012 Share Repurchase Programs at an aggregate cost of $22.1 million. All such share repurchases were made during the three months ended May 4, 2013. As of November 1, 2014, the Company had remaining authority under the 2012 Share Repurchase Program to purchase $495.8 million of its common stock and no remaining authority to purchase shares under the 2011 Share Repurchase Program.

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(3)
Stockholders’ Equity and Redeemable Noncontrolling Interests
A reconciliation of the total carrying amount of total stockholders’ equity, Guess?, Inc. stockholders’ equity and stockholders’ equity attributable to nonredeemable and redeemable noncontrolling interests for the fiscal year ended February 1, 2014 and nine months ended November 1, 2014 is as follows (in thousands):
 
Stockholders’ Equity
 
 
 
Guess?, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
 
Redeemable
Noncontrolling
Interests
Balance at February 2, 2013
$
1,086,992

 
$
13,876

 
$
1,100,868

 
$
3,144

Net earnings
153,434

 
4,277

 
157,711

 

Foreign currency translation adjustment
(17,621
)
 
(804
)
 
(18,425
)
 
(104
)
Gain on derivative financial instruments designated as cash flow hedges, net of income tax of ($237)
1,669

 

 
1,669

 

Loss on marketable securities, net of income tax of $4
(7
)
 

 
(7
)
 

SERP plan amendment, prior service cost amortization and actuarial valuation gain (loss) and related amortization, net of income tax of ($2,963)
4,619

 

 
4,619

 

Issuance of common stock under stock compensation plans, net of tax effect
2,404

 

 
2,404

 

Issuance of stock under Employee Stock Purchase Plan
980

 

 
980

 

Share-based compensation
13,949

 

 
13,949

 

Dividends
(68,215
)
 

 
(68,215
)
 

Share repurchases
(22,099
)
 

 
(22,099
)
 

Noncontrolling interest capital contribution

 

 

 
1,199

Noncontrolling interest capital distribution

 
(1,877
)
 
(1,877
)
 

Redeemable noncontrolling interest redemption value adjustment
(1,591
)
 

 
(1,591
)
 
1,591

Balance at February 1, 2014
$
1,154,514

 
$
15,472

 
$
1,169,986

 
$
5,830

Net earnings
40,641

 
954

 
41,595

 

Foreign currency translation adjustment
(44,196
)
 
(362
)
 
(44,558
)
 
(330
)
Gain on derivative financial instruments designated as cash flow hedges, net of income tax of ($162)
4,997

 

 
4,997

 

Loss on marketable securities, net of income tax of $63
(103
)
 

 
(103
)
 

SERP prior service credit and actuarial valuation amortization, net of income tax of ($202)
327

 

 
327

 

Issuance of common stock under stock compensation plans, net of tax effect
(385
)
 

 
(385
)
 

Issuance of stock under Employee Stock Purchase Plan
826

 

 
826

 

Share-based compensation
11,374

 

 
11,374

 

Dividends
(57,725
)
 

 
(57,725
)
 

Redeemable noncontrolling interest redemption value adjustment
605

 

 
605

 
(605
)
Balance at November 1, 2014
$
1,110,875

 
$
16,064

 
$
1,126,939

 
$
4,895


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Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss), net of related income taxes, for the three and nine months ended November 1, 2014 and November 2, 2013 are as follows (in thousands):
 
Three Months Ended Nov 1, 2014
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
SERP
 
Total
Balance at August 2, 2014
$
(4,578
)
 
$
366

 
$
8

 
$
(6,570
)
 
$
(10,774
)
Gains (losses) arising during the period
(46,621
)
 
3,805

 
(8
)
 

 
(42,824
)
Reclassification to net earnings for losses realized

 
713

 

 
109

 
822

Net other comprehensive income (loss)
(46,621
)
 
4,518

 
(8
)
 
109

 
(42,002
)
Balance at November 1, 2014
$
(51,199
)
 
$
4,884

 
$

 
$
(6,461
)
 
$
(52,776
)
 
Nine Months Ended Nov 1, 2014
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
SERP
 
Total
Balance at February 1, 2014
$
(7,003
)
 
$
(113
)
 
$
103

 
$
(6,788
)
 
$
(13,801
)
Gains (losses) arising during the period
(44,196
)
 
3,099

 
(49
)
 

 
(41,146
)
Reclassification to net earnings for (gains) losses realized

 
1,898

 
(54
)
 
327

 
2,171

Net other comprehensive income (loss)
(44,196
)
 
4,997

 
(103
)
 
327

 
(38,975
)
Balance at November 1, 2014
$
(51,199
)
 
$
4,884

 
$

 
$
(6,461
)
 
$
(52,776
)
 
Three Months Ended Nov 2, 2013
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
SERP
 
Total
Balance at August 3, 2013
$
(11,197
)
 
$
1,558

 
$
88

 
$
(8,076
)
 
$
(17,627
)
Gains (losses) arising during the period
11,726

 
(657
)
 
25

 

 
11,094

Reclassification to net earnings for (gains) losses realized
180

 
(1,086
)
 

 
135

 
(771
)
Net other comprehensive income (loss)
11,906

 
(1,743
)
 
25

 
135

 
10,323

Balance at November 2, 2013
$
709

 
$
(185
)
 
$
113

 
$
(7,941
)
 
$
(7,304
)
 
Nine Months Ended Nov 2, 2013
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
SERP
 
Total
Balance at February 2, 2013
$
10,618

 
$
(1,782
)
 
$
110

 
$
(11,407
)
 
$
(2,461
)
Gains (losses) arising during the period
(10,089
)
 
3,495

 
3

 
2,796

 
(3,795
)
Reclassification to net earnings for (gains) losses realized
180

 
(1,898
)
 

 
670

 
(1,048
)
Net other comprehensive income (loss)
(9,909
)
 
1,597

 
3

 
3,466

 
(4,843
)
Balance at November 2, 2013
$
709

 
$
(185
)
 
$
113

 
$
(7,941
)
 
$
(7,304
)

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Details on reclassifications out of accumulated other comprehensive income (loss) to net earnings during the three and nine months ended November 1, 2014 and November 2, 2013 are as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
Location of
(Gain) Loss
Reclassified from
Accumulated OCI
into Earnings 
 
Nov 1, 2014
 
Nov 2, 2013
 
Nov 1, 2014
 
Nov 2, 2013
 
Foreign currency translation adjustment:
 
 
 
 
 
 
 
 
 
   Liquidation of investment in a foreign entity
$

 
$
180

 
$

 
$
180

 
Restructuring charges
 

 
180

 

 
180

 
 
Derivative financial instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
   Foreign exchange currency contracts
800

 
(1,344
)
 
1,559

 
(2,216
)
 
Cost of sales
   Foreign exchange currency contracts

 
(4
)
 
56

 
(98
)
 
Other income/expense
      Less income tax effect
(87
)
 
262

 
283

 
416

 
Income tax expense
 
713

 
(1,086
)
 
1,898

 
(1,898
)
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
   Available-for-sale securities

 

 
(87
)
 

 
Other income/expense
      Less income tax effect

 

 
33

 

 
Income tax expense
 

 

 
(54
)
 

 
 
SERP:
 
 
 
 
 
 
 
 
 
   Actuarial loss amortization
234

 
277

 
703

 
831

 
(1) 
   Prior service (credit) cost amortization
(58
)
 
(58
)
 
(174
)
 
253

 
(1) 
      Less income tax effect
(67
)
 
(84
)
 
(202
)
 
(414
)
 
Income tax expense
 
109

 
135

 
327

 
670

 
 
Total reclassifications during the period
$
822

 
$
(771
)
 
$
2,171

 
$
(1,048
)
 
 
__________________________________
(1)
These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost. Refer to Note 13 for further information.
Redeemable Noncontrolling Interests
The Company is party to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest from the acquisition of its majority-owned subsidiary, Guess Sud SAS (“Guess Sud”). The put arrangement for Guess Sud, representing 40% of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holders by providing written notice to the Company any time after January 30, 2012. The put arrangement is recorded on the balance sheet at its expected redemption value based on a method which approximates fair value and classified as a redeemable noncontrolling interest outside of permanent equity. The redemption value of the Guess Sud redeemable put arrangement was $3.8 million and $4.7 million at November 1, 2014 and February 1, 2014, respectively.
During fiscal 2014, the Company entered into a majority-owned joint venture to establish Guess Brasil Comércio e Distribuição S.A. (“Guess Brazil”). The Company funded $1.8 million to obtain a 60% interest in Guess Brazil and is subject to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest. The put arrangement may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company beginning in fiscal 2020, or sooner in certain limited circumstances, and every third anniversary thereafter subject to certain time restrictions. The redemption value of the Guess Brazil put arrangement is based on a multiple of Guess Brazil’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments. The redemption value of the Guess Brazil redeemable put arrangement was $1.1 million at November 1, 2014 and February 1, 2014.

10

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(4)
Accounts Receivable
Accounts receivable is summarized as follows (in thousands):
 
Nov 1, 2014
 
Feb 1, 2014
Trade
$
240,046

 
$
291,411

Royalty
25,174

 
16,372

Other
5,793

 
8,174

 
271,013

 
315,957

Less allowance for doubtful accounts
34,960

 
39,392

 
$
236,053

 
$
276,565

Accounts receivable consists of trade receivables relating primarily to the Company’s wholesale business in Europe, and to a lesser extent, to its wholesale businesses in North America and Asia, and royalty receivables relating to its licensing operations. The accounts receivable allowance includes allowances for doubtful accounts, wholesale sales returns and wholesale markdowns. Retail sales returns allowances are included in accrued expenses.
(5)
Inventories
Inventories consist of the following (in thousands):
 
Nov 1, 2014
 
Feb 1, 2014
Raw materials
$
9,263

 
$
10,585

Work in progress
56

 
977

Finished goods
403,254

 
339,337

 
$
412,573

 
$
350,899

As of November 1, 2014 and February 1, 2014, the Company had an allowance to write down inventories to the lower of cost or market of $21.0 million and $23.4 million, respectively.
(6)
Restructuring Charges
During the first quarter of fiscal 2014, the Company implemented plans to streamline its structure and reduce expenses in both Europe and North America. During the second quarter of fiscal 2014, the Company expanded these plans to include the consolidation and streamlining of certain operations in Europe and Asia. There were no restructuring charges incurred during the three and nine months ended November 1, 2014 as the actions under these plans were substantially completed during fiscal 2014. The Company does not expect significant future cash-related severance and lease termination charges related to these plans to be incurred during the remainder of fiscal 2015. During the three and nine months ended November 2, 2013, the Company incurred restructuring charges of $1.9 million and $10.4 million, respectively, related primarily to severance, impairment and lease termination costs. As of November 1, 2014, the Company had a balance of approximately $1.2 million in accrued expenses for amounts expected to be paid during the remainder of fiscal 2015. At February 1, 2014, the Company had a balance of approximately $4.6 million in accrued expenses related to these restructuring activities.

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The following table summarizes the components of the restructuring activities during the fiscal year ended February 1, 2014 and nine months ended November 1, 2014 (in thousands):
 
Severance
 
Impairment and Lease Termination
 
Total
Balance at February 2, 2013
$

 
$

 
$

Charges to operations
9,206

 
3,236

 
12,442

Non-cash write-offs

 
(1,717
)
 
(1,717
)
Cash payments
(4,567
)
 
(1,492
)
 
(6,059
)
Foreign currency and other adjustments
(61
)
 
(27
)
 
(88
)
Balance at February 1, 2014
$
4,578

 
$

 
$
4,578

Cash payments
(2,194
)
 

 
(2,194
)
Foreign currency and other adjustments
(1,159
)
 

 
(1,159
)
Balance at November 1, 2014
$
1,225

 
$

 
$
1,225

(7)
Income Taxes
Income tax expense for the interim periods was computed using the effective tax rate estimated to be applicable for the full fiscal year. The Company’s effective income tax rate increased to 34.0% for the nine months ended November 1, 2014 from 33.0% for the nine months ended November 2, 2013.
The Company accrues an amount for its estimate of additional income tax liability which the Company, more likely than not, could incur as a result of the ultimate resolution of income tax audits (“uncertain tax positions”). The Company reviews and updates the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events.
The Company had aggregate accruals for uncertain tax positions, including penalties and interest, of $12.4 million and $11.4 million as of November 1, 2014 and February 1, 2014, respectively. The change in the accrual balance from February 1, 2014 to November 1, 2014 resulted from additional accruals and the impact of interest during the nine months ended November 1, 2014.
(8)
Segment Information
The Company’s businesses are grouped into five reportable segments for management and internal financial reporting purposes: North American Retail, Europe, Asia, North American Wholesale and Licensing. Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before restructuring charges, if any. The Company believes this segment reporting reflects how its five business segments are managed and each segment’s performance is evaluated by the Company’s chief operating decision maker to assess performance and make resource allocation decisions. The North American Retail segment includes the Company’s retail and e-commerce operations in North America and its retail operations in Central and South America. The Europe segment includes the Company’s wholesale, retail and e-commerce operations in Europe and the Middle East. The Asia segment includes the Company’s wholesale, retail and e-commerce operations in Asia. The North American Wholesale segment includes the Company’s wholesale operations in North America and Central and South America. The Licensing segment includes the worldwide licensing operations of the Company. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization, and restructuring charges. These costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, facilities, global advertising and marketing, human resources, information technology and legal.

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Net revenue and earnings (loss) from operations are summarized as follows for the three and nine months ended November 1, 2014 and November 2, 2013 (in thousands):
    
 
Three Months Ended
 
Nine Months Ended
 
Nov 1, 2014
 
Nov 2, 2013
 
Nov 1, 2014
 
Nov 2, 2013
Net revenue:
 

 
 

 
 
 
 
North American Retail
$
243,238

 
$
253,820

 
$
715,582

 
$
746,444

Europe
189,852

 
200,943

 
584,270

 
616,707

Asia
71,271

 
72,727

 
205,656

 
209,711

North American Wholesale
53,501

 
53,591

 
131,061

 
138,777

Licensing
31,972

 
32,416

 
84,377

 
89,784

Total net revenue
$
589,834

 
$
613,497

 
$
1,720,946

 
$
1,801,423

Earnings (loss) from operations:
 

 
 

 
 
 
 
North American Retail
$
(10,517
)
 
$
6,206

 
$
(23,578
)
 
$
12,363

Europe
7,660

 
13,538

 
25,541

 
47,595

Asia
2,126

 
5,894

 
7,743

 
17,897

North American Wholesale
13,940

 
12,102

 
26,860

 
29,229

Licensing
28,157

 
29,171

 
75,787

 
80,476

Corporate Overhead
(16,501
)
 
(17,063
)
 
(59,607
)
 
(57,141
)
Restructuring Charges

 
(1,889
)
 

 
(10,355
)
Total earnings from operations
$
24,865

 
$
47,959

 
$
52,746

 
$
120,064

Due to the seasonal nature of the Company’s business segments, the above net revenue and operating results are not necessarily indicative of the results that may be expected for the full fiscal year. Restructuring charges incurred during the three and nine months ended November 2, 2013 related to plans to streamline and consolidate the Company’s operations and reduce expenses in Europe, North America and Asia. Refer to Note 6 for more information regarding these restructuring charges.
(9)
Borrowings and Capital Lease Obligations
Borrowings and capital lease obligations are summarized as follows (in thousands):
 
Nov 1, 2014
 
Feb 1, 2014
European capital lease, maturing quarterly through 2016
$
6,798

 
$
8,637

Other
1,647

 
3,103

 
8,445

 
11,740

Less current installments
1,707

 
4,160

Long-term capital lease obligations and other debt
$
6,738

 
$
7,580

Capital Lease
The Company entered into a capital lease in December 2005 for a building in Florence, Italy. As of November 1, 2014, the capital lease obligation was $6.8 million. The Company entered into a separate interest rate swap agreement designated as a non-hedging instrument that resulted in a swap fixed rate of 3.55%. This interest rate swap agreement matures in calendar year 2016 and converts the nature of the capital lease obligation from Euribor floating-rate debt to fixed-rate debt. The fair value of the interest rate swap liability as of November 1, 2014 was approximately $0.4 million.
Credit Facilities
On July 6, 2011, the Company entered into a five-year senior secured revolving credit facility with JPMorgan Chase Bank, N.A., Bank of America, N.A. and the other lenders party thereto (the “Credit Facility”) which provided for a $200 million revolving multicurrency line of credit. The Credit Facility is available for direct borrowings and the issuance of letters of credit, subject to certain letters of credit sublimits. It may be used for working capital and other general corporate purposes.

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Table of Contents

On August 31, 2012, the Company increased its borrowing capacity under the Credit Facility from $200 million to $300 million by exercising the accordion feature in the Credit Facility pursuant to a Lender Joinder Agreement with the lenders party thereto. Also on August 31, 2012, the Company entered into an Amendment to the Credit Facility with the lenders party thereto to provide for (i) greater flexibility in certain of the Company’s covenants under the Credit Facility and (ii) access to a new $100 million accordion feature, subject to certain conditions and the willingness of existing or new lenders to assume such increased amount. As of November 1, 2014, the Company had $1.7 million in outstanding standby letters of credit, no outstanding documentary letters of credit and no outstanding borrowings under the Credit Facility.
The Company, through its European subsidiaries, maintains short-term uncommitted borrowing agreements, primarily for working capital purposes, with various banks in Europe. The majority of the borrowings under these agreements are secured by specific accounts receivable balances. Based on the applicable accounts receivable balances as of November 1, 2014, the Company could have borrowed up to $98.2 million under these agreements. As of November 1, 2014, the Company had no outstanding borrowings and $1.6 million in outstanding documentary letters of credit under these agreements. The agreements are denominated primarily in euros and provide for annual interest rates ranging from 0.5% to 2.9%. The maturities of any short-term borrowings under these arrangements are generally linked to the credit terms of the underlying accounts receivable that secure the borrowings. With the exception of one facility for up to $43.8 million that has a minimum net equity requirement, there are no other financial ratio covenants.
Other
From time-to-time, the Company will obtain other financing in foreign countries for working capital to finance its local operations.
(10)
Share-Based Compensation
The following table summarizes the share-based compensation expense recognized under all of the Company’s stock plans during the three and nine months ended November 1, 2014 and November 2, 2013 (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
Nov 1, 2014
 
Nov 2, 2013
 
Nov 1, 2014
 
Nov 2, 2013
Stock options
$
542

 
$
530

 
$
1,618

 
$
1,787

Nonvested stock awards/units
3,187

 
3,272

 
9,564

 
7,871

Employee Stock Purchase Plan
32

 
43

 
192

 
186

Total share-based compensation expense
$
3,761

 
$
3,845

 
$
11,374

 
$
9,844

Unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested stock options and nonvested stock awards/units totaled approximately $3.6 million and $19.8 million, respectively, as of November 1, 2014. This cost is expected to be recognized over a weighted average period of 1.6 years. The weighted average fair values of stock options granted during the nine months ended November 1, 2014 and November 2, 2013 were $6.23 and $6.21, respectively. 
Grants
On April 2, 2014, the Company made an annual grant of 365,600 stock options and 301,200 nonvested stock awards/units to its employees. On April 3, 2013, the Company made an annual grant of 416,500 stock options and 408,400 nonvested stock awards/units to its employees.
Performance Awards
On July 11, 2013, the Company granted 100,000 nonvested stock units to Paul Marciano, the Company’s Chief Executive Officer and Vice Chairman of the Board, in connection with an employment agreement entered into between the Company and Mr. Marciano. The nonvested stock units had an initial vesting period of seven months followed by two annual vesting periods, which were subject to the achievement of performance-based vesting conditions for the last three quarters of fiscal 2014 and continued service vesting conditions through the

14

Table of Contents

vesting periods. The Company also granted a target of 143,700 nonvested stock units to Mr. Marciano, of which approximately 84% are expected to vest based on the achievement of performance-based conditions for the last three quarters of fiscal 2014 subject to continued service vesting conditions through the vesting date. Such shares are scheduled to vest on February 1, 2016.
On April 8, 2014, the Company granted 100,000 nonvested stock units to Mr. Marciano which have an initial vesting period of ten months followed by two annual vesting periods, subject to the achievement of performance-based vesting conditions for fiscal 2015 and continued service vesting conditions through the vesting periods. The Company also granted a target of 159,700 nonvested stock units to Mr. Marciano on April 8, 2014. The number of shares that may ultimately vest will equal 0% to 150% of the target number of shares, subject to the achievement of performance-based vesting conditions for fiscal 2015 and continued service vesting conditions through the vesting date. Any shares ultimately issued are scheduled to vest on January 31, 2017.
(11)
Related Party Transactions
The Company and its subsidiaries periodically enter into transactions with other entities or individuals that are considered related parties, including certain transactions with entities affiliated with trusts for the respective benefit of Paul Marciano, who is an executive of the Company, Maurice Marciano, Chairman of the Board, Armand Marciano, their brother and former executive of the Company, and certain of their children (the “Marciano Trusts”).
Leases
The Company leases warehouse and administrative facilities, including the Company’s corporate headquarters in Los Angeles, California, from partnerships affiliated with the Marciano Trusts and certain of their affiliates. There were four of these leases in effect at November 1, 2014 with expiration dates ranging from 2015 to 2020.
Aggregate rent, common area maintenance charges and property tax expense recorded under these related party leases for the nine months ended November 1, 2014 and November 2, 2013 was $4.6 million and $4.9 million, respectively. The Company believes the related party lease terms have not been significantly affected by the fact that the Company and the lessors are related.
Aircraft Arrangements
The Company periodically charters aircraft owned by MPM Financial, LLC (“MPM Financial”), an entity affiliated with the Marciano Trusts, through MPM Financial and independent third party management companies contracted by MPM Financial to manage its aircraft. Under an informal arrangement with MPM Financial and the third party management companies, the Company has chartered, and may from time-to-time continue to charter, aircraft owned by MPM Financial at a discount from the third party management companies’ preferred customer hourly charter rates. The total fees paid under these arrangements for the nine months ended November 1, 2014 and November 2, 2013 were approximately $1.2 million and $0.5 million, respectively.
Consulting Arrangement
After serving for over 30 years as an executive and leader for Guess?, Inc., co-founder Maurice Marciano elected to retire from his position as executive Chairman of the Board and as an employee of the Company upon the expiration of his employment agreement on January 28, 2012. Mr. Marciano continues to serve the Company as its non-executive Chairman of the Board. In addition, under the terms of his previously existing employment agreement, the Company and Mr. Marciano entered into a two-year consulting agreement (the “Marciano Consulting Agreement”) under which Mr. Marciano provided certain consulting services to the Company, including advice and counsel to the Company’s Chief Executive Officer and other senior executives. The Marciano Consulting Agreement, which had a two-year term that commenced on January 28, 2012, provided for consulting fees of $500,000 per year and continued automobile use in a manner consistent with past practice. In January 2014, the Company extended the Marciano Consulting Agreement for an additional one-year period. Total expenses incurred with respect to the Marciano Consulting Agreement were approximately $0.4 million for each of the nine months ended November 1, 2014 and November 2, 2013.

15

Table of Contents

Other Transactions
From time-to-time, the Company utilizes a third-party agent named Harmony Collection, LLC to produce specific apparel products on behalf of the Company. Armand Marciano, brother of Maurice and Paul Marciano, is part owner and an executive of the parent company of Harmony Collection, LLC. The total payments made by the Company under this arrangement for the nine months ended November 1, 2014 and November 2, 2013 were approximately $1.0 million and $1.6 million, respectively. The Company believes that the price and transaction terms have not been significantly affected by the relationship between the parties.
These related party disclosures should be read in conjunction with the disclosure concerning related party transactions in the Company’s Annual Report on Form 10-K for the year ended February 1, 2014.
(12)
Commitments and Contingencies
Leases
The Company leases its showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under operating lease agreements expiring on various dates through September 2031. Some of these leases require the Company to make periodic payments for property taxes, utilities and common area operating expenses. Certain retail store leases provide for rents based upon the minimum annual rental amount and a percentage of annual sales volume, generally ranging from 2% to 12%, when specific sales volumes are exceeded. Some leases include lease incentives, rent abatements and fixed rent escalations, which are amortized and recorded over the initial lease term on a straight-line basis. The Company also leases some of its equipment under operating lease agreements expiring at various dates through December 2018. As discussed in further detail in Note 9, the Company leases a building in Florence, Italy under a capital lease.
In March 2014, the Company amended its lease with respect to its primary U.S. distribution center based in Louisville, Kentucky to extend the term for an additional ten years, to 2024. The amendment also provides for two extension options for an additional period of five years each.
Litigation
On May 6, 2009, Gucci America, Inc. filed a complaint in the U.S. District Court for the Southern District of New York against Guess?, Inc. and certain third-party licensees for the Company asserting, among other things, trademark and trade dress law violations and unfair competition. The complaint sought injunctive relief, compensatory damages, including treble damages, and certain other relief. Complaints similar to those in the above action have also been filed by Gucci entities against the Company and certain of its subsidiaries in the Court of Milan, Italy, the Intermediate People’s Court of Nanjing, China and the Court of Paris, France. The three-week bench trial in the U.S. matter concluded on April 19, 2012, with the court issuing a preliminary ruling on May 21, 2012 and a final ruling on July 19, 2012. Although the plaintiff was seeking compensation in the U.S. matter in the form of damages of $26 million and an accounting of profits of $99 million, the final ruling provided for monetary damages of $2.3 million against the Company and $2.3 million against certain of its licensees. The court also granted narrow injunctions in favor of the plaintiff for certain of the claimed infringements. On August 20, 2012, the appeal period expired without any party having filed an appeal, rendering the judgment final. On May 2, 2013, the Court of Milan ruled in favor of the Company in the Milan, Italy matter. In the ruling, the Court rejected all of the plaintiff’s claims and ordered the cancellation of three of the plaintiff’s Italian and four of the plaintiff’s European Community trademark registrations. On June 10, 2013, the plaintiff appealed the Court’s ruling in the Milan matter. On September 15, 2014, the Court of Appeal of Milan affirmed the majority of the lower Court’s ruling in favor of the Company, but overturned the lower Court’s finding with respect to an unfair competition claim. The matter has now entered into a damages phase based on the ruling. In the China matter, the Intermediate People’s Court of Nanjing, China issued a ruling on November 8, 2013 granting an injunction in favor of the plaintiff for certain of the claimed infringements on handbags and small leather goods and awarding the plaintiff statutory damages in the amount of approximately $80,000. The Company strongly disagrees with the Court’s decision and has appealed the ruling. The judgment in the China matter is stayed

16

Table of Contents

pending the appeal, which was heard in May 2014. The hearings in the France matter concluded in September 2014 and the matter is currently under submission with the Court of Paris.
On August 25, 2006, Franchez Isaguirre, a former employee of the Company, filed a complaint in the Superior Court of California, County of Los Angeles alleging violations by the Company of California wage and hour laws. The complaint was subsequently amended, adding a second former employee as an additional named party. The plaintiffs purport to represent a class of similarly situated employees in California who allegedly had been injured by not being provided adequate meal and rest breaks. The complaint seeks unspecified compensatory damages, statutory penalties, attorney’s fees and injunctive and declaratory relief. On June 9, 2009, the Court certified the class but immediately stayed the case pending the resolution of a separate California Supreme Court case on the standards of class treatment for meal and rest break claims. Following the Supreme Court ruling, the Superior Court denied the Company’s motions to decertify the class and to narrow the class in January 2013 and June 2013, respectively. The Company subsequently petitioned to have the Court’s decision not to narrow the class definition reviewed. That petition was ultimately denied by the California Supreme Court in April 2014. No trial date has been set.
Although the Company believes that it has a strong position and will continue to vigorously defend each of these remaining matters, it is unable to predict with certainty whether or not these efforts will ultimately be successful or whether the outcomes will have a material impact on the Company’s financial position or results of operations.
The Company is also involved in various other claims and other matters incidental to the Company’s business, the resolution of which is not expected to have a material adverse effect on the Company’s financial position or results of operations. No material amounts were accrued as of November 1, 2014 or February 1, 2014 related to any of the Company’s legal proceedings.
(13)
Supplemental Executive Retirement Plan
The components of net periodic pension cost for the three and nine months ended November 1, 2014 and November 2, 2013 were as follows (in thousands):    
 
Three Months Ended
 
Nine Months Ended
 
Nov 1, 2014
 
Nov 2, 2013
 
Nov 1, 2014
 
Nov 2, 2013
Interest cost
$
573

 
$
586

 
$
1,717

 
$
1,758

Net amortization of unrecognized prior service (credit) cost
(58
)
 
(58
)
 
(174
)
 
253

Net amortization of actuarial losses
234

 
277

 
703

 
831

Net periodic defined benefit pension cost
$
749

 
$
805

 
$
2,246

 
$
2,842

In July 2013, the Company amended the SERP to limit the amount of eligible wages under the plan that count toward the SERP benefit for the active participant. As a result, the projected benefit obligation and unrecognized prior service cost were reduced by $4.5 million during fiscal 2014.
As a non-qualified pension plan, no dedicated funding of the SERP is required; however, the Company has made, and may continue to make, periodic payments into insurance policies held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP. The amount of any future payments into the insurance policies may vary, depending on any changes to the estimates of final annual compensation levels and investment performance of the trust. The cash surrender values of the insurance policies were $54.4 million and $51.4 million as of November 1, 2014 and February 1, 2014, respectively, and were included in other assets in the Company’s condensed consolidated balance sheets. As a result of changes in the value of the insurance policy investments, the Company recorded unrealized gains of $0.8 million and $3.0 million in other income during the three and nine months ended November 1, 2014, respectively, and unrealized gains of $1.3 million and $3.8 million in other income during the three and nine months ended November 2, 2013, respectively. The projected benefit obligation was $55.6 million and $54.7 million as of November 1, 2014 and February 1, 2014, respectively, and was included in accrued expenses and other long-term liabilities in the Company’s condensed consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of $0.6 million and $0.8 million were made during the three and nine months ended November 1, 2014, respectively.

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(14)
Fair Value Measurements
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e. interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of November 1, 2014 and February 1, 2014 (in thousands):
 
 
Fair Value Measurements at Nov 1, 2014
 
Fair Value Measurements at Feb 1, 2014
Recurring Fair Value Measures
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange currency contracts
 
$

 
$
11,469

 
$

 
$
11,469

 
$

 
$
2,116

 
$

 
$
2,116

Available-for-sale securities
 
40

 

 

 
40

 
5,732

 

 

 
5,732

Total
 
$
40

 
$
11,469

 
$

 
$
11,509

 
$
5,732

 
$
2,116

 
$

 
$
7,848

Liabilities:
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Foreign exchange currency contracts
 
$

 
$

 
$

 
$

 
$

 
$
1,712

 
$

 
$
1,712

Interest rate swap
 

 
358

 

 
358

 

 
581

 

 
581

Deferred compensation obligations
 

 
8,993

 

 
8,993

 

 
7,498

 

 
7,498

Total
 
$

 
$
9,351

 
$

 
$
9,351

 
$

 
$
9,791

 
$

 
$
9,791

 
There were no transfers of financial instruments between the three levels of fair value hierarchy during the nine months ended November 1, 2014 or during the year ended February 1, 2014.
The fair values of the Companys available-for-sale securities are based on quoted prices. The fair value of the interest rate swaps are based upon inputs corroborated by observable market data. Foreign exchange forward contracts are entered into by the Company principally to hedge the future payment of inventory and intercompany transactions by non-U.S. subsidiaries. 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 fair values of the Companys foreign exchange forward contracts are based on quoted foreign exchange forward rates at the reporting date. Deferred compensation obligations to employees are adjusted based on changes in the fair value of the underlying employee-directed investments. Fair value of these obligations is based upon inputs corroborated by observable market data.
Available-for-sale securities are recorded at fair value and are included in short-term investments and other assets in the accompanying condensed consolidated balance sheets depending on their respective maturity dates. At November 1, 2014, available-for-sale securities consisting of marketable equity securities were minimal. During the nine months ended November 1, 2014, the Company received proceeds of $0.6 million from the sale of marketable equity securities which were classified as available-for-sale securities. The sale of marketable equity securities was made during the three months ended May 4, 2013. The cost of securities sold was based on the specific identification method. Gains recognized during the nine months ended November 1, 2014 were $0.1 million as a result of this sale and were included in other income. Unrealized gains (losses), net of taxes, are included as a component of stockholders equity and comprehensive income (loss). There were no accumulated

18

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unrealized gains (losses) included in accumulated other comprehensive income (loss) related to available-for-sale securities owned by the Company at November 1, 2014.
At February 1, 2014, available-for-sale securities consisted of $5.1 million of corporate bonds and $0.6 million of marketable equity securities. The accumulated unrealized gains, net of taxes, included in accumulated other comprehensive income (loss) related to available-for-sale securities owned by the Company at February 1, 2014 were $0.1 million.
The carrying amount of the Companys remaining financial instruments, which principally include cash and cash equivalents, trade receivables, accounts payable and accrued expenses, approximates fair value due to the relatively short maturity of such instruments. The fair values of the Companys debt instruments (see Note 9) are based on the amount of future cash flows associated with each instrument discounted using the Companys incremental borrowing rate. At November 1, 2014 and February 1, 2014, the carrying value of all financial instruments was not materially different from fair value, as the interest rates on variable-rate debt including the capital lease obligation approximated rates currently available to the Company. 
Long-Lived Assets
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment quarterly or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers each individual store as an asset group for impairment testing, which is the lowest level at which individual cash flows can be identified. The asset group includes store leasehold improvements, furniture, fixtures and equipment, computer hardware and software and certain long-term security deposits and lease acquisition costs. The Company reviews retail stores for impairment risk once the locations have been opened for at least one year, or sooner as changes in circumstances require. The Company believes that waiting one year allows a store to reach a maturity level where a more comprehensive analysis of financial performance can be performed.
An asset is considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment of the assets ability to continue to generate earnings from operations and positive cash flow in future periods or if significant changes in the Companys strategic business objectives and utilization of the assets occurred. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value, which is determined based on discounted future cash flows. The impairment loss calculations require management to apply judgment in estimating future cash flows and the discount rates that reflect the risk inherent in future cash flows. Future expected cash flows for store assets are based on managements estimates of future cash flows over the remaining lease period or expected life, if shorter. The Company considers historical trends, expected future business trends and other factors when estimating each stores future cash flow. The Company also considers factors such as: the local environment for each store location, including mall traffic and competition; the Companys ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of sales and payroll and, in some cases, renegotiate lease costs. The estimated cash flows used for this nonrecurring fair value measurement are considered a Level 3 input as defined above. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the Companys results of operations.
The Company recorded impairment charges of $9.8 million and $14.6 million during the three and nine months ended November 1, 2014, respectively, and $0.8 million and $3.9 million during the three and nine months ended November 2, 2013, respectively, related primarily to the full impairment of certain under-performing retail stores in North America and Europe. These impairment charges, which exclude impairment charges incurred during the three and nine months ended November 2, 2013 related to restructuring activities, were included in selling, general and administrative expenses in the Company’s condensed consolidated statements of income for each of the respective periods. Refer to Note 6 for more information regarding impairment charges related to restructuring activities.

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(15)
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 November 1, 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.

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Summary of Derivative Instruments
The fair value of derivative instruments in the condensed consolidated balance sheets as of November 1, 2014 and February 1, 2014 was as follows (in thousands):
 
 
Derivative
Balance Sheet
Location
 
Fair Value at
Nov 1, 2014
 
Fair Value at
Feb 1, 2014
ASSETS:
 
 
 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts:
 
 
 
 
 
 
   Cash flow hedges
 
Other current assets
 
$
4,781

 
$
977

Derivatives not designated as hedging instruments:
 
 
 
 
 
 

Foreign exchange currency contracts
 
Other current assets
 
6,688

 
1,139

Total
 
 
 
$
11,469

 
$
2,116

LIABILITIES:
 
 
 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts:
 
 
 
 
 
 
   Cash flow hedges
 
Accrued expenses
 
$

 
$
672

Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts
 
Accrued expenses
 

 
1,040

Interest rate swaps
 
Other long-term liabilities
 
358

 
581

Total derivatives not designated as hedging instruments
 
 
 
358

 
1,621

Total
 
 
 
$
358

 
$
2,293

Derivatives Designated as Hedging Instruments
Cash Flow Hedges
During the nine months ended November 1, 2014, the Company purchased U.S. dollar forward contracts in Canada and Europe totaling US$40.4 million and US$38.2 million, respectively, to hedge forecasted merchandise purchases and intercompany royalties that were designated as cash flow hedges. As of November 1, 2014, the Company had forward contracts outstanding for its European and Canadian operations of US$51.9 million and US$11.5 million, respectively, which are expected to mature over the next ten months.

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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 November 1, 2014 and November 2, 2013 (in thousands): 
 
Gain (Loss)
Recognized in
OCI
 
Location of
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings(1)
 
Gain (Loss)
Reclassified from
Accumulated OCI into
Earnings
 
Three Months
Ended
Nov 1, 2014
 
Three Months
Ended
Nov 2, 2013
 
 
Three Months
Ended
Nov 1, 2014
 
Three Months
Ended
Nov 2, 2013
Derivatives designated as cash flow hedges:
 

 
 

 
 
 
 

 
 

Foreign exchange currency contracts
$
3,869

 
$
(694
)
 
Cost of sales
 
$
(800
)
 
$
1,344

Foreign exchange currency contracts
$
487

 
$
(17
)
 
Other income/expense
 
$

 
$
4


 
Gain
Recognized in
OCI
 
Location of
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings(1)
 
Gain (Loss)
Reclassified from
Accumulated OCI into
Earnings
 
Nine Months
Ended
Nov 1, 2014
 
Nine Months
Ended
Nov 2, 2013
 
 
Nine Months
Ended
Nov 1, 2014
 
Nine Months
Ended
Nov 2, 2013
Derivatives designated as cash flow hedges:
 

 
 

 
 
 
 

 
 

Foreign exchange currency contracts
$
3,163

 
$
3,785

 
Cost of sales
 
$
(1,559
)
 
$
2,216

Foreign exchange currency contracts
$
381

 
$
401

 
Other income/expense
 
$
(56
)
 
$
98

 __________________________________
(1)
The ineffective portion was immaterial during the three and nine months ended November 1, 2014 and November 2, 2013 and was recorded in net earnings and included in interest income/expense.
As of November 1, 2014, accumulated other comprehensive income (loss) included a net unrealized gain of approximately $4.9 million, net of tax, which will be recognized in cost of product sales or other income 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
 
Nine Months Ended
 
Nov 1,
2014
 
Nov 2,
2013
 
Nov 1,
2014
 
Nov 2,
2013
Beginning balance gain (loss)
$
366

 
$
1,558

 
$
(113
)
 
$
(1,782
)
Net gains (losses) from changes in cash flow hedges
3,805

 
(657
)
 
3,099

 
3,495

Net (gains) losses reclassified to earnings
713

 
(1,086
)
 
1,898

 
(1,898
)
Ending balance gain (loss)
$
4,884

 
$
(185
)
 
$
4,884

 
$
(185
)
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 November 1, 2014, the Company had euro foreign currency contracts to purchase US$72.2 million expected to mature over the next ten months and Canadian dollar foreign currency contracts to purchase US$5.0 million expected to mature over the next one month.

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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 and nine months ended November 1, 2014 and November 2, 2013 (in thousands):
 
Location of
Gain (Loss)
Recognized in
Earnings
 
Gain (Loss)
Recognized in Earnings
 
Gain
Recognized in Earnings
 
 
Three Months
Ended
Nov 1, 2014
 
Three Months
Ended
Nov 2, 2013
 
Nine Months
Ended
Nov 1, 2014
 
Nine Months
Ended
Nov 2, 2013
Derivatives not designated as hedging instruments:
 
 
 

 
 

 
 
 
 
Foreign exchange currency contracts
Other income/expense
 
$
6,262

 
$
(1,916
)
 
$
7,457

 
$
1,133

Interest rate swaps
Other income/expense
 
$
54

 
$
(22
)
 
$
186

 
$
174

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.
(16)
Subsequent Events
On December 3, 2014