10-Q
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 August 1, 2015
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 September 1, 2015 the registrant had 85,759,076 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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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) 
 
Aug 1,
2015
 
Jan 31,
2015
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
470,946

 
$
483,483

Accounts receivable, net
198,735

 
216,205

Inventories
335,460

 
319,078

Other current assets
85,013

 
92,593

Total current assets
1,090,154

 
1,111,359

Property and equipment, net
241,579

 
259,524

Goodwill
33,766

 
34,133

Other intangible assets, net
8,009

 
9,745

Long-term deferred tax assets
66,513

 
68,747

Other assets
123,591

 
117,897

 
$
1,563,612

 
$
1,601,405

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of capital lease obligations
$
4,840

 
$
1,548

Accounts payable
159,244

 
159,924

Accrued expenses
155,132

 
140,494

Total current liabilities
319,216

 
301,966

Long-term debt and capital lease obligations
2,057

 
6,165

Deferred rent and lease incentives
78,820

 
81,761

Other long-term liabilities
99,721

 
117,630

 
499,814

 
507,522

Redeemable noncontrolling interests
5,349

 
4,437

 
 
 
 
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 139,975,804 and 139,559,000 shares, outstanding 85,763,440 and 85,323,154 shares, as of August 1, 2015 and January 31, 2015, respectively
858

 
853

Paid-in capital
459,838

 
453,546

Retained earnings
1,247,339

 
1,265,524

Accumulated other comprehensive loss
(142,804
)
 
(127,065
)
Treasury stock, 54,212,364 and 54,235,846 shares as of August 1, 2015 and January 31, 2015, respectively
(518,778
)
 
(519,002
)
Guess?, Inc. stockholders’ equity
1,046,453

 
1,073,856

Nonredeemable noncontrolling interests
11,996

 
15,590

Total stockholders’ equity
1,058,449

 
1,089,446

 
$
1,563,612

 
$
1,601,405

 
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
 
Six Months Ended
 
Aug 1,
2015
 
Aug 2,
2014
 
Aug 1,
2015
 
Aug 2,
2014
Product sales
$
520,937

 
$
581,779

 
$
973,896

 
$
1,078,707

Net royalties
25,327

 
26,792

 
51,192

 
52,405

Net revenue
546,264

 
608,571

 
1,025,088

 
1,131,112

Cost of product sales
348,147

 
391,794

 
661,486

 
738,104

Gross profit
198,117

 
216,777

 
363,602

 
393,008

Selling, general and administrative expenses
171,916

 
186,919

 
333,048

 
365,127

Earnings from operations
26,201

 
29,858

 
30,554

 
27,881

Other income (expense):
 

 
 

 
 
 
 
Interest expense
(729
)
 
(772
)
 
(1,164
)
 
(1,297
)
Interest income
239

 
320

 
511

 
725

Other income, net
3,708

 
4,766

 
6,334

 
3,647

 
3,218

 
4,314

 
5,681

 
3,075

 
 
 
 
 
 
 
 
Earnings before income tax expense
29,419

 
34,172

 
36,235

 
30,956

Income tax expense
10,940

 
11,900

 
13,769

 
10,871

Net earnings
18,479

 
22,272

 
22,466

 
20,085

Net earnings attributable to noncontrolling interests
190

 
318

 
836

 
232

Net earnings attributable to Guess?, Inc.
$
18,289

 
$
21,954

 
$
21,630

 
$
19,853

 
 
 
 
 
 
 
 
Net earnings per common share attributable to common stockholders (Note 2):
Basic
$
0.21

 
$
0.26

 
$
0.25

 
$
0.23

Diluted
$
0.21

 
$
0.26

 
$
0.25

 
$
0.23

 
 
 
 
 
 
 
 
Weighted average common shares outstanding attributable to common stockholders (Note 2):
Basic
85,004

 
84,573

 
84,985

 
84,536

Diluted
85,290

 
84,799

 
85,132

 
84,765

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.225

 
$
0.225

 
$
0.450

 
$
0.450


See accompanying notes to condensed consolidated financial statements.


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GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
Aug 1,
2015
 
Aug 2,
2014
 
Aug 1,
2015
 
Aug 2,
2014
Net earnings
$
18,479

 
$
22,272

 
$
22,466

 
$
20,085

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

 
 

 
 
 
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
Gains (losses) arising during the period
(20,933
)
 
(19,708
)
 
(21,636
)
 
2,542

Derivative financial instruments designated as cash flow hedges
 

 
 

 
 
 
 
Gains (losses) arising during the period
5,721

 
1,867

 
4,426

 
(812
)
Less income tax effect
(1,137
)
 
(515
)
 
(768
)
 
106

Reclassification to net earnings for (gains) losses realized
(3,523
)
 
290

 
(5,759
)
 
815

Less income tax effect
511

 
391

 
812

 
370

Marketable securities
 

 
 

 
 
 
 
Losses arising during the period
(7
)
 
(40
)
 
(14
)
 
(66
)
Less income tax effect
3

 
15

 
6

 
25

Reclassification to net earnings for gains realized

 

 

 
(87
)
Less income tax effect

 

 

 
33

Defined benefit plans
 

 
 

 
 
 
 
Actuarial gain
11,378

 

 
11,378

 

Less income tax effect
(4,352
)
 

 
(4,352
)
 

Actuarial loss amortization
430

 
235

 
943

 
469

Prior service credit amortization
(39
)
 
(58
)
 
(97
)
 
(116
)
Curtailment
(1,651
)
 

 
(1,651
)
 

Less income tax effect
522

 
(68
)
 
373

 
(135
)
Total comprehensive income
5,402

 
4,681

 
6,127

 
23,229

Less comprehensive income (loss) attributable to noncontrolling interests:
 

 
 

 
 
 
 
Net earnings
190

 
318

 
836

 
232

Foreign currency translation adjustment
(236
)
 
(284
)
 
(600
)
 
117

Amounts attributable to noncontrolling interests
(46
)
 
34

 
236

 
349

Comprehensive income attributable to Guess?, Inc.
$
5,448

 
$
4,647

 
$
5,891

 
$
22,880


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)
 
Six Months Ended
 
Aug 1,
2015
 
Aug 2,
2014
Cash flows from operating activities:
 

 
 

Net earnings
$
22,466

 
$
20,085

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
 

Depreciation and amortization of property and equipment
35,363

 
41,363

Amortization of intangible assets
1,080

 
1,291

Share-based compensation expense
8,052

 
7,613

Unrealized forward contract gains
(1,979
)
 
(1,047
)
Net (gain) loss on disposition of long-term assets and property and equipment
(171
)
 
5,986

Other items, net
167

 
847

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
12,943

 
42,381

Inventories
(21,791
)
 
(43,485
)
Prepaid expenses and other assets
(5,624
)
 
(8,484
)
Accounts payable and accrued expenses
18,432

 
(30,286
)
Deferred rent and lease incentives
(2,455
)
 
(442
)
Other long-term liabilities
(9,747
)
 
(5,459
)
Net cash provided by operating activities
56,736

 
30,363

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(24,963
)
 
(32,316
)
Changes in other assets
1,768

 
319

Proceeds from sale of investment

 
598

Acquisition of businesses, net of cash acquired
(846
)
 
(309
)
Net cash settlement of forward contracts
6,814

 
(842
)
Net cash used in investing activities
(17,227
)
 
(32,550
)
Cash flows from financing activities:
 

 
 

Payment of debt issuance costs
(945
)
 

Proceeds from borrowings
581

 
786

Repayment of capital lease obligations and borrowings
(756
)
 
(3,720
)
Dividends paid
(38,520
)
 
(38,455
)
Noncontrolling interest capital distributions
(3,830
)
 

Issuance of common stock, net of nonvested award repurchases
(1,052
)
 
619

Excess tax benefits from share-based compensation
79

 
148

Net cash used in financing activities
(44,443
)
 
(40,622
)
Effect of exchange rates on cash and cash equivalents
(7,603
)
 
1,383

Net change in cash and cash equivalents
(12,537
)
 
(41,426
)
Cash and cash equivalents at the beginning of the year
483,483

 
502,945

Cash and cash equivalents at the end of the period
$
470,946

 
$
461,519

 
 
 
 
Supplemental cash flow data:
 

 
 

Interest paid
$
508

 
$
870

Income taxes paid
$
14,590

 
$
46,208

 
See accompanying notes to condensed consolidated financial statements.

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GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 1, 2015
(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 August 1, 2015 and January 31, 2015, the condensed consolidated statements of income and comprehensive income for the three and six months ended August 1, 2015 and August 2, 2014 and the condensed consolidated statements of cash flows for the six months ended August 1, 2015 and August 2, 2014. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission. 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 six months ended August 1, 2015 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 January 31, 2015.
The three and six months ended August 1, 2015 had the same number of days as the three and six months ended August 2, 2014. All references herein to “fiscal 2016,” “fiscal 2015” and “fiscal 2014” represent the results of the 52-week fiscal year ending January 30, 2016 and the 52-week fiscal years ended January 31, 2015 and February 1, 2014, respectively. 
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Guess?, Inc., its wholly-owned direct and indirect subsidiaries and its non wholly-owned subsidiaries and joint ventures in which the Company has a controlling financial interest and is determined to be the primary beneficiary. Accordingly, all references herein to “Guess?, Inc.” include the consolidated results of the Company, its wholly-owned subsidiaries and its joint ventures. All intercompany accounts and transactions are eliminated during the consolidation process.
Reclassifications
The Company has made certain reclassifications to prior year amounts to conform to the current period presentation within the accompanying notes to the condensed consolidated financial statements.
New Accounting Guidance
In April 2014, the Financial Accounting Standards Board (“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. The Company adopted this guidance effective February 1, 2015. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements for the three and six months ended August 1, 2015.
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

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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, 2017, which will be the Company’s first quarter of fiscal 2019, and allows for either full retrospective or modified retrospective adoption. Early adoption is permitted for fiscal periods beginning after December 15, 2016, which will be the Company’s first quarter of fiscal 2018. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements, including the choice of application method upon adoption.
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, which will be the Company’s fourth quarter of fiscal 2017, with early adoption permitted. The adoption of this guidance is not expected to impact the Company’s consolidated financial statements or related disclosures.
In February 2015, the FASB issued authoritative guidance which modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. This guidance is effective for fiscal periods beginning after December 15, 2015, which will be the Company’s first quarter of fiscal 2017, and allows for either full retrospective or modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements, including the choice of application method upon adoption.
In April 2015, the FASB issued authoritative guidance to simplify the presentation of debt issuance costs by requiring such costs to be presented as a deduction from the corresponding debt liability. This guidance is effective for fiscal years beginning after December 15, 2015, which will be the Company’s first quarter of fiscal 2017, and requires retrospective adoption, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures.
In April 2015, the FASB issued authoritative guidance which would permit an entity to measure its defined benefit plan assets and obligations using the calendar month-end that is closest to the entity’s fiscal period-end for interim and annual periods. This guidance is effective for fiscal years beginning after December 15, 2015, which will be the Company’s first quarter of fiscal 2017, and requires prospective adoption, with early adoption permitted. The Company is currently evaluating whether it will adopt this guidance, but if adopted, this guidance is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures.
In July 2015, the FASB issued authoritative guidance to simplify the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. This guidance is effective for fiscal years beginning after December 15, 2016, which will be the Company’s first quarter of fiscal 2018, and requires prospective adoption, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on 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. The weighted average number of common shares outstanding does not include restricted stock units with forfeitable dividend rights that have been classified as issued and outstanding but are considered contingently returnable as a result of certain service conditions. These restricted stock units are considered common equivalent shares outstanding and are excluded from the basic earnings per share calculation until the respective service conditions have been met. 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

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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.
In addition, the Company has granted certain nonvested stock units that are subject to certain performance-based or market-based vesting conditions as well as continued service requirements through the respective vesting periods. These nonvested stock units are included in the computation of diluted net earnings per common share attributable to common stockholders only to the extent that the underlying performance-based or market-based vesting conditions are satisfied as of the end of the reporting period, or would be considered satisfied if the end of the reporting period were the end of the related contingency period, and the results would be dilutive under the treasury stock method.
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
 
Six Months Ended
 
Aug 1, 2015
 
Aug 2, 2014
 
Aug 1, 2015
 
Aug 2, 2014
Net earnings attributable to Guess?, Inc.
$
18,289

 
$
21,954

 
$
21,630

 
$
19,853

Less net earnings attributable to nonvested restricted stockholders
143

 
167

 
227

 
292

Net earnings attributable to common stockholders
$
18,146

 
$
21,787

 
$
21,403

 
$
19,561

 
 
 
 
 
 
 
 
Weighted average common shares used in basic computations
85,004

 
84,573

 
84,985

 
84,536

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options and restricted stock units
286

 
226

 
147

 
229

Weighted average common shares used in diluted computations
85,290

 
84,799

 
85,132

 
84,765

 
 
 
 
 
 
 
 
Net earnings per common share attributable to common stockholders:
Basic
$
0.21

 
$
0.26

 
$
0.25

 
$
0.23

Diluted
$
0.21

 
$
0.26

 
$
0.25

 
$
0.23

For the three months ended August 1, 2015 and August 2, 2014, equity awards granted for 2,525,300 and 1,666,111, respectively, of the Company’s common shares and for the six months ended August 1, 2015 and August 2, 2014, equity awards granted for 2,473,325 and 1,549,291, 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 six months ended August 1, 2015, the Company also excluded 425,866 nonvested stock units which are subject to the achievement of performance-based or market-based vesting conditions from the computation of diluted weighted average common shares and common share equivalents outstanding because these conditions were not achieved as of August 1, 2015. For the three and six months ended August 2, 2014, the Company excluded 259,700 nonvested stock units which were subject to the achievement of performance-based vesting conditions from the computation of diluted weighted average common shares and common share equivalents outstanding because these conditions were not achieved as of August 2, 2014.

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Share Repurchase Program
On June 26, 2012, the Company’s Board of Directors authorized a 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”). Repurchases under the program 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 the program, which may be discontinued at any time, without prior notice. As of August 1, 2015, the Company had remaining authority under the 2012 Share Repurchase Program to purchase $495.8 million of its common stock. There were no share repurchases during the three and six months ended August 1, 2015 and August 2, 2014.

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(3)
Stockholders’ Equity and Redeemable Noncontrolling Interests
A reconciliation of common stock outstanding, treasury stock and 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 January 31, 2015 and six months ended August 1, 2015 is as follows (in thousands, except share data):
 
Shares
 
Stockholders’ Equity
 
 
 
Common Stock
 
Treasury Stock
 
Guess?, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
 
Redeemable
Noncontrolling
Interests
Balance at February 1, 2014
84,962,345

 
54,283,384

 
$
1,154,514

 
$
15,472

 
$
1,169,986

 
$
5,830

Net earnings

 

 
94,570

 
2,614

 
97,184

 

Foreign currency translation adjustment

 

 
(114,566
)
 
(2,141
)
 
(116,707
)
 
(788
)
Gain on derivative financial instruments designated as cash flow hedges, net of income tax of ($721)

 

 
7,270

 

 
7,270

 

Loss on marketable securities, net of income tax of $61

 

 
(106
)
 

 
(106
)
 

Prior service credit amortization and actuarial valuation loss and related amortization on defined benefit plans, net of income tax of $2,335

 

 
(5,862
)
 

 
(5,862
)
 

Issuance of common stock under stock compensation plans, net of tax effect
313,271

 

 
(1,937
)
 

 
(1,937
)
 

Issuance of stock under Employee Stock Purchase Plan
47,538

 
(47,538
)
 
1,008

 

 
1,008

 

Share-based compensation

 

 
15,342

 

 
15,342

 

Dividends

 

 
(76,982
)
 

 
(76,982
)
 

Noncontrolling interest capital distribution

 

 

 
(355
)
 
(355
)
 

Redeemable noncontrolling interest redemption value adjustment

 

 
605

 

 
605

 
(605
)
Balance at January 31, 2015
85,323,154

 
54,235,846

 
$
1,073,856

 
$
15,590

 
$
1,089,446

 
$
4,437

Net earnings

 

 
21,630

 
836

 
22,466

 

Foreign currency translation adjustment

 

 
(21,036
)
 
(600
)
 
(21,636
)
 
(308
)
Loss on derivative financial instruments designated as cash flow hedges, net of income tax of $44

 

 
(1,289
)
 

 
(1,289
)
 

Loss on marketable securities, net of income tax of $6

 

 
(8
)
 

 
(8
)
 

Actuarial valuation gain (loss) and related amortization, curtailment and prior service credit amortization on defined benefit plans, net of income tax of ($3,979)

 

 
6,594

 

 
6,594

 

Issuance of common stock under stock compensation plans, net of tax effect
416,804

 

 
(1,842
)
 

 
(1,842
)
 

Issuance of stock under Employee Stock Purchase Plan
23,482

 
(23,482
)
 
374

 

 
374

 

Share-based compensation

 

 
8,052

 

 
8,052

 

Dividends

 

 
(38,658
)
 

 
(38,658
)
 

Noncontrolling interest capital distribution

 

 

 
(3,830
)
 
(3,830
)
 

Redeemable noncontrolling interest redemption value adjustment

 

 
(1,220
)
 

 
(1,220
)
 
1,220

Balance at August 1, 2015
85,763,440

 
54,212,364

 
$
1,046,453

 
$
11,996

 
$
1,058,449

 
$
5,349


9

Table of Contents

Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss), net of related income taxes, for the three and six months ended August 1, 2015 and August 2, 2014 are as follows (in thousands):
 
Three Months Ended Aug 1, 2015
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
Defined Benefit Plans
 
Total
Balance at May 2, 2015
$
(121,908
)
 
$
4,296

 
$
(7
)
 
$
(12,344
)
 
$
(129,963
)
Gains (losses) arising during the period
(20,697
)
 
4,584

 
(4
)
 
7,026

 
(9,091
)
Reclassification to net earnings for gains realized

 
(3,012
)
 

 
(738
)
 
(3,750
)
Net other comprehensive income (loss)
(20,697
)
 
1,572

 
(4
)
 
6,288

 
(12,841
)
Balance at August 1, 2015
$
(142,605
)
 
$
5,868

 
$
(11
)
 
$
(6,056
)
 
$
(142,804
)
 
Six Months Ended Aug 1, 2015
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
Defined Benefit Plans
 
Total
Balance at January 31, 2015
$
(121,569
)
 
$
7,157

 
$
(3
)
 
$
(12,650
)
 
$
(127,065
)
Gains (losses) arising during the period
(21,036
)
 
3,658

 
(8
)
 
7,026

 
(10,360
)
Reclassification to net earnings for gains realized

 
(4,947
)
 

 
(432
)
 
(5,379
)
Net other comprehensive income (loss)
(21,036
)
 
(1,289
)
 
(8
)
 
6,594

 
(15,739
)
Balance at August 1, 2015
$
(142,605
)
 
$
5,868

 
$
(11
)
 
$
(6,056
)
 
$
(142,804
)
 
Three Months Ended Aug 2, 2014
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
Defined Benefit Plans
 
Total
Balance at May 3, 2014
$
14,846

 
$
(1,667
)
 
$
33

 
$
(6,679
)
 
$
6,533

Gains (losses) arising during the period
(19,424
)
 
1,352

 
(25
)
 

 
(18,097
)
Reclassification to net earnings for losses realized

 
681

 

 
109

 
790

Net other comprehensive income (loss)
(19,424
)
 
2,033

 
(25
)
 
109

 
(17,307
)
Balance at August 2, 2014
$
(4,578
)
 
$
366

 
$
8

 
$
(6,570
)
 
$
(10,774
)
 
Six Months Ended Aug 2, 2014
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
Defined Benefit Plans
 
Total
Balance at February 1, 2014
$
(7,003
)
 
$
(113
)
 
$
103

 
$
(6,788
)
 
$
(13,801
)
Gains (losses) arising during the period
2,425

 
(706
)
 
(41
)
 

 
1,678

Reclassification to net earnings for (gains) losses realized

 
1,185

 
(54
)
 
218

 
1,349

Net other comprehensive income (loss)
2,425

 
479

 
(95
)
 
218

 
3,027

Balance at August 2, 2014
$
(4,578
)
 
$
366

 
$
8

 
$
(6,570
)
 
$
(10,774
)

10

Table of Contents

Details on reclassifications out of accumulated other comprehensive income (loss) to net earnings during the three and six months ended August 1, 2015 and August 2, 2014 are as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
Location of
(Gain) Loss
Reclassified from
Accumulated OCI
into Earnings
 
Aug 1, 2015
 
Aug 2, 2014
 
Aug 1, 2015
 
Aug 2, 2014
 
Derivative financial instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
   Foreign exchange currency contracts
$
(3,193
)
 
$
265

 
$
(4,943
)
 
$
759

 
Cost of product sales
   Foreign exchange currency contracts
(330
)
 
25

 
(816
)
 
56

 
Other income/expense
      Less income tax effect
511

 
391

 
812

 
370

 
Income tax expense
 
(3,012
)
 
681

 
(4,947
)
 
1,185

 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
   Available-for-sale securities

 

 

 
(87
)
 
Other income/expense
      Less income tax effect

 

 

 
33

 
Income tax expense
 

 

 

 
(54
)
 
 
Defined benefit plans:
 
 
 
 
 
 
 
 
 
   Actuarial loss amortization
430

 
235

 
943

 
469

 
(1) 
   Prior service credit amortization
(39
)
 
(58
)
 
(97
)
 
(116
)
 
(1) 
   Curtailment
(1,651
)
 

 
(1,651
)
 

 
(1) 
      Less income tax effect
522

 
(68
)
 
373

 
(135
)
 
Income tax expense
 
(738
)
 
109

 
(432
)
 
218

 
 
Total reclassifications during the period
$
(3,750
)
 
$
790

 
$
(5,379
)
 
$
1,349

 
 
__________________________________
(1)
These accumulated other comprehensive income (loss) components are included in the computation of net periodic defined benefit 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 $4.5 million and $3.4 million as of August 1, 2015 and January 31, 2015, respectively.
The Company is also party to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest for its majority-owned subsidiary, Guess Brasil Comércio e Distribuição S.A. (“Guess Brazil”), which was established through a majority-owned joint venture during fiscal 2014. The put arrangement for Guess Brazil, representing 40% of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company beginning in the sixth year of the agreement, or sooner in certain limited circumstances, and every third anniversary from the end of the sixth year 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 carrying value of the redeemable noncontrolling interest related to Guess Brazil was $0.8 million and $1.0 million as of August 1, 2015 and January 31, 2015, respectively.

11

Table of Contents

(4)
Accounts Receivable
Accounts receivable is summarized as follows (in thousands):
 
Aug 1, 2015
 
Jan 31, 2015
Trade
$
208,976

 
$
229,618

Royalty
10,830

 
10,118

Other
8,404

 
8,389

 
228,210

 
248,125

Less allowance for doubtful accounts
29,475

 
31,920

 
$
198,735

 
$
216,205

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 the Americas and Asia, royalty receivables relating to its licensing operations, and certain other receivables. Other receivables generally relate to amounts due to the Company that result from activities that are not related to the direct sale of the Company’s products or collection of royalties. 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):
 
Aug 1, 2015
 
Jan 31, 2015
Raw materials
$
3,409

 
$
4,548

Work in progress
59

 
77

Finished goods
331,992

 
314,453

 
$
335,460

 
$
319,078

The above balances include an allowance to write down inventories to the lower of cost or market of $18.6 million and $19.7 million as of August 1, 2015 and January 31, 2015, 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. The Company incurred total restructuring charges of $12.4 million under these plans related primarily to severance, impairment and lease termination costs during fiscal 2014. There were no restructuring charges incurred during the three and six months ended August 1, 2015 and August 2, 2014 related to these plans. The Company does not expect significant future cash-related charges to be incurred as the actions under these plans were substantially completed during fiscal 2014. As of August 1, 2015, the Company had a balance of approximately $0.2 million in accrued expenses for amounts expected to be paid during the remainder of fiscal 2016. At January 31, 2015, the Company had a balance of approximately $0.3 million in accrued expenses related to these restructuring activities.
The following table summarizes restructuring activities related primarily to severance during the fiscal year ended January 31, 2015 and six months ended August 1, 2015 (in thousands):
 
Total
Balance at February 1, 2014
$
4,578

Cash payments
(2,952
)
Foreign currency and other adjustments
(1,350
)
Balance at January 31, 2015
$
276

Cash payments
(39
)
Foreign currency and other adjustments
(56
)
Balance at August 1, 2015
$
181


12

Table of Contents

(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 38.0% for the six months ended August 1, 2015 from 35.1% for the six months ended August 2, 2014. The increase in the effective income tax rate was due primarily to a larger mix of taxable income in higher taxable jurisdictions and higher non-deductible compensation costs during the six months ended August 1, 2015 compared to the same prior-year period.
From time-to-time, the Company is subject to routine compliance reviews on various tax matters around the world in the ordinary course of business. As of August 1, 2015, several income tax audits were underway for various periods in multiple jurisdictions. 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 $14.3 million and $14.4 million as of August 1, 2015 and January 31, 2015, respectively.
(8)
Segment Information
The Company’s businesses are grouped into five reportable segments for management and internal financial reporting purposes: Americas Retail, Europe, Asia, Americas Wholesale and Licensing. Beginning in the second quarter of fiscal 2016, the Company changed the names of its “North American Retail” and “North American Wholesale” segments to “Americas Retail” and “Americas Wholesale” to better reflect that these segments are inclusive of its operations in North America as well as Central and South America. There have been no changes to the underlying reporting in either segment. The Company’s operating segments are the same as its reportable segments. 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 how each segment’s performance is evaluated by the Company’s chief operating decision maker to assess performance and make resource allocation decisions. The Americas Retail segment includes the Company’s retail and e-commerce operations in North and Central America and its retail operations in 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 Americas Wholesale segment includes the Company’s wholesale operations in the Americas. 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.

13

Table of Contents

Net revenue and earnings (loss) from operations are summarized as follows for the three and six months ended August 1, 2015 and August 2, 2014 (in thousands):    
 
Three Months Ended
 
Six Months Ended
 
Aug 1, 2015
 
Aug 2, 2014
 
Aug 1, 2015
 
Aug 2, 2014
Net revenue:
 

 
 

 
 
 
 
Americas Retail(1)
$
232,456

 
$
244,000

 
$
446,705

 
$
472,344

Europe
199,375

 
235,260

 
336,772

 
394,418

Asia
56,745

 
64,267

 
120,780

 
134,385

Americas Wholesale(1)
32,361

 
38,252

 
69,639

 
77,560

Licensing
25,327

 
26,792

 
51,192

 
52,405

Total net revenue
$
546,264

 
$
608,571

 
$
1,025,088

 
$
1,131,112

Earnings (loss) from operations:
 

 
 

 
 
 
 
Americas Retail(1)
$
5,244

 
$
(4,662
)
 
$
(1,965
)
 
$
(13,061
)
Europe
18,186

 
24,513

 
14,518

 
17,881

Asia
887

 
2,264

 
5,500

 
5,617

Americas Wholesale(1)
4,872

 
5,167

 
11,619

 
12,920

Licensing
22,415

 
24,909

 
45,440

 
47,630

Corporate Overhead
(25,403
)
 
(22,333
)
 
(44,558
)
 
(43,106
)
Total earnings from operations
$
26,201

 
$
29,858

 
$
30,554

 
$
27,881

__________________________________
(1)
Beginning in the second quarter of fiscal 2016, the Company changed the names of its “North American Retail” and “North American Wholesale” segments to “Americas Retail” and “Americas Wholesale” to better reflect that these segments are inclusive of its operations in North America as well as Central and South America. There have been no changes to the underlying reporting in either segment.
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.
(9)
Borrowings and Capital Lease Obligations
Borrowings and capital lease obligations are summarized as follows (in thousands):
 
Aug 1, 2015
 
Jan 31, 2015
European capital lease, maturing quarterly through May 2016
$
4,840

 
$
5,745

Other
2,057

 
1,968

 
6,897

 
7,713

Less current installments
4,840

 
1,548

Long-term debt and capital lease obligations
$
2,057

 
$
6,165

Capital Lease
The Company leases a building in Florence, Italy under a capital lease which provides for minimum lease payments through May 1, 2016. As of August 1, 2015, the capital lease obligation was $4.8 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 on February 1, 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 August 1, 2015 was approximately $0.2 million.
Credit Facilities
On June 23, 2015, the Company entered into a five-year senior secured asset-based revolving credit facility with Bank of America, N.A. and the other lenders party thereto (the “Credit Facility”). The Credit Facility provides for a borrowing capacity in an amount up to $150 million, including a Canadian sub-facility up to $50 million, subject to a borrowing base. Based on applicable accounts receivable, inventory and eligible cash balances as of August 1, 2015, the Company could have borrowed up to $150 million under the Credit Facility. The Credit Facility has an option to expand the borrowing capacity by up to $150 million subject to certain terms and conditions, including the willingness of existing or new lenders to assume such increased amount. The Credit

14

Table of Contents

Facility is available for direct borrowings and the issuance of letters of credit, subject to certain letters of credit sublimits, and may be used for working capital and other general corporate purposes. The Credit Facility replaces the Company’s previous $300 million credit facility, which was scheduled to mature in July 2016. No principal or interest was outstanding or accrued and unpaid under the prior credit facility on its termination date.
All obligations under the Credit Facility are unconditionally guaranteed by the Company and the Company’s existing and future domestic and Canadian subsidiaries, subject to certain exceptions, and are secured by a first priority lien on substantially all of the assets of the Company and such domestic and Canadian subsidiaries, as applicable.
Direct borrowings under the Credit Facility made by the Company and its domestic subsidiaries shall bear interest at the U.S. base rate plus an applicable margin (varying from 0.25% to 0.75%) or at LIBOR plus an applicable margin (varying from 1.25% to 1.75%). The U.S. base rate is based on the greater of (i) the U.S. prime rate, (ii) the federal funds rate, plus 0.5%, and (iii) LIBOR for a 30 day interest period, plus 1.0%. Direct borrowings under the Credit Facility made by the Company’s Canadian subsidiaries shall bear interest at the Canadian prime rate plus an applicable margin (varying from 0.25% to 0.75%) or at the Canadian BA rate plus an applicable margin (varying from 1.25% to 1.75%). The Canadian prime rate is based on the greater of (i) the Canadian prime rate, (ii) the Bank of Canada overnight rate, plus 0.5%, and (iii) the Canadian BA rate for a one month interest period, plus 1.0%. The applicable margins are calculated quarterly and vary based on the average daily availability of the aggregate borrowing base. The Company is also obligated to pay certain commitment, letter of credit and other fees customary for a credit facility of this size and type. As of August 1, 2015, 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 Credit Facility requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if a default or an event of default occurs under the Credit Facility or if the borrowing capacity falls below certain levels. In addition, the Credit Facility contains customary covenants, including covenants that limit or restrict the Company and certain of its subsidiaries’ ability to: incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. Upon the occurrence of an event of default under the Credit Facility, the lenders may cease making loans, terminate the Credit Facility and declare all amounts outstanding to be immediately due and payable. The Credit Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults. The Credit Facility allows for both secured and unsecured borrowings outside of the Credit Facility up to specified amounts.
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 August 1, 2015, the Company could have borrowed up to $80.8 million under these agreements. As of August 1, 2015, the Company had no outstanding borrowings and $3.0 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 0.9% to 6.8%. 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 $38.4 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.

15

Table of Contents

(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 six months ended August 1, 2015 and August 2, 2014 (in thousands): 
 
Three Months Ended
 
Six Months Ended
 
Aug 1, 2015
 
Aug 2, 2014
 
Aug 1, 2015
 
Aug 2, 2014
Stock options
$
439

 
$
620

 
$
920

 
$
1,076

Stock awards/units
3,950

 
3,439

 
7,037

 
6,377

Employee Stock Purchase Plan
51

 
97

 
95

 
160

Total share-based compensation expense
$
4,440

 
$
4,156

 
$
8,052

 
$
7,613

Unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested stock options and nonvested stock awards/units totaled approximately $5.1 million and $29.3 million, respectively, as of August 1, 2015. This cost is expected to be recognized over a weighted average period of 1.7 years. The weighted average grant date fair value of options granted was $3.71 and $6.23 during the six months ended August 1, 2015 and August 2, 2014, respectively. 
Grants
On July 7, 2015, in connection with a new employment agreement entered into between the Company and Victor Herrero (the “Herrero Employment Agreement”), who became the Company’s Chief Executive Officer on August 1, 2015, the Company granted Mr. Herrero 600,000 stock options and 250,000 nonvested stock units. Mr. Herrero was also granted 150,000 restricted stock units which are considered contingently returnable as a result of certain service conditions set forth in the Herrero Employment Agreement.
On April 2, 2015, the Company made an annual grant of 577,700 stock options and 401,700 nonvested stock awards/units to its employees. 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.
Performance-Based Awards
As discussed above, on July 7, 2015, the Company granted certain nonvested stock units to Mr. Herrero in connection with the Herrero Employment Agreement. The nonvested stock units are scheduled to vest in increments of one-fourth of the shares granted on each anniversary from the date of grant, subject to the achievement of certain performance-based vesting conditions during the last two quarters of fiscal 2016 as well as continued service requirements through each of the vesting periods.
The Company has granted certain nonvested stock units to Paul Marciano, the Company’s former Chief Executive Officer and current Executive Chairman of the Board and Chief Creative Officer, in connection with an employment agreement entered into between the Company and Mr. Marciano during fiscal 2014. Each award of nonvested stock units has an initial vesting period from the date of the grant through the end of the first fiscal year followed by two annual vesting periods. The nonvested stock units are subject to the achievement of certain performance-based vesting conditions during the first fiscal year of the grant as well as continued service requirements through each of the vesting periods.
The Company has also granted a target number of nonvested stock units to Mr. Marciano in connection with his employment agreement. The number of shares that may ultimately vest with respect to each award will equal 0% to 150% of the target number of shares, subject to the achievement of certain performance-based vesting conditions during the first fiscal year of the grant as well as continued service requirements through the vesting date. Any shares that are ultimately issued are scheduled to vest at the end of the third fiscal year following the grant date.

16

Table of Contents

The following table summarizes the activity for nonvested performance-based awards during the six months ended August 1, 2015:
 
Number of
Units
 
Weighted
Average
Grant Date
Fair Value
Nonvested at January 31, 2015
413,834

 
$
29.66

Granted
425,866

 
19.39

Vested
(33,333
)
 
27.86

Forfeited
(159,700
)
 
27.86

Nonvested at August 1, 2015
646,667

 
$
23.44

Market-Based Awards
On May 1, 2015, the Company also granted a target of 183,368 nonvested stock units to Mr. Marciano in connection with his employment agreement. The number of shares that may ultimately vest will equal 0% to 150% of the target number of shares, subject to the performance of the Company’s total stockholder return (“TSR”) relative to the TSR of a select group of peer companies over a three-year period. Vesting is also subject to continued service requirements through the vesting date. Any shares that are ultimately issued are scheduled to vest in fiscal 2019. The grant date fair value for such nonvested stock units was estimated using a Monte Carlo simulation that incorporates option-pricing inputs covering the period from the grant date through the end of the performance period. Compensation expense is recognized on a straight-line basis over the vesting period.
(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 Emeritus 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 three of these leases in effect as of August 1, 2015 with expiration dates ranging from calendar years 2015 to 2020.
Aggregate rent, common area maintenance charges and property tax expense recorded under these related party leases for the six months ended August 1, 2015 and August 2, 2014 was $2.7 million and $3.0 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 informal arrangements with MPM Financial and independent third party management companies contracted by MPM Financial to manage its aircraft. The total fees paid under these arrangements for the six months ended August 1, 2015 and August 2, 2014 were approximately $0.3 million and $0.7 million, respectively.

17

Table of Contents

Consulting Arrangement
After serving for over 30 years as an executive and leader for Guess?, Inc., co-founder Maurice Marciano retired 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. In connection with his retirement and under the terms of his previously existing employment agreement, the Company and Mr. Marciano entered into a two-year consulting agreement, subsequently extended for a third year (the “Marciano Consulting Agreement”), under which Mr. Marciano provided certain consulting services to the Company. The Marciano Consulting Agreement provided for consulting fees of $500,000 per year and continued automobile use in a manner consistent with past practice. The Marciano Consulting Agreement expired on January 28, 2015 and was not renewed. However, Mr. Marciano continues to serve the Company as a director and the Chairman Emeritus of the Board. The Company elected to continue to provide for automobile use subsequent to the expiration of the term of the Marciano Consulting Agreement based on Mr. Marciano’s continuing substantial contributions to the Company. There were no expenses incurred related to the Marciano Consulting Agreement during the six months ended August 1, 2015. Total expenses incurred with respect to the Marciano Consulting Agreement were approximately $0.3 million for the six months ended August 2, 2014.
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. There were no payments made by the Company under this arrangement for the six months ended August 1, 2015. The total payments made by the Company under this arrangement for the six months ended August 2, 2014 were approximately $0.7 million.
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 January 31, 2015.
(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 March 2020. As discussed in further detail in Note 9, the Company leases a building in Florence, Italy under a capital lease which provides for minimum lease payments through May 1, 2016.
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

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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 pending the appeal, which was heard in May 2014. On January 30, 2015, the Court of Paris ruled in favor of the Company, rejecting all of the plaintiff’s claims and partially canceling two of the plaintiff’s community trademark registrations and one of the plaintiff’s international trademark registrations. On February 17, 2015, the plaintiff appealed the Court of Paris’ ruling.
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. In July 2015, the parties entered into a Memorandum of Understanding to settle the matter for $5.25 million, subject to certain limited offsets. Once a formal settlement agreement is finalized by the parties, the settlement will be subject to the review and approval of the Court.
The Company has received customs tax assessment notices from the Italian Customs Agency regarding its customs tax audit of one of the Company’s European subsidiaries for the period from July 2010 through December 2012. Such assessments totaled €9.8 million ($10.8 million), including potential penalties and interest. The Company strongly disagrees with the positions that the Italian Customs Agency has taken and therefore filed appeals with the Milan First Degree Tax Court (“MFDTC”). On May 5, 2015, the MFDTC issued a judgment in favor of the Company in relation to the first set of appeals (covering the period through September 2010) and canceled the related assessments totaling €1.7 million ($1.8 million). While the ruling was favorable to the Company, there can be no assurances that the Company’s remaining appeals for October 2010 through December 2012 will be successful or that the Italian Customs Agency will not appeal the favorable MFDTC judgment. It also continues to be possible that the Company will receive similar or even larger assessments for periods subsequent to December 2012 or other claims or charges related to the matter in the future.
Although the Company believes that it has a strong position and will continue to vigorously defend each of the 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.

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The Company is also involved in various other claims and other matters incidental to the Company’s business, the resolutions of which are not expected to have a material adverse effect on the Company’s financial position or results of operations.
(13)
Defined Benefit Plans
Supplemental Executive Retirement Plan
On August 23, 2005, the Board of Directors of the Company adopted a Supplemental Executive Retirement Plan (“SERP”) which became effective January 1, 2006. The SERP provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment, death, disability or a change in control of the Company, in certain prescribed circumstances.
In July 2015, the SERP was amended in connection with Paul Marciano’s planned transition from Chief Executive Officer to Executive Chairman of the Board and Chief Creative Officer. The amendment effectively eliminated any future salary progression by finalizing compensation levels for future benefits. Mr. Marciano will continue to be eligible to receive SERP benefits in the future in accordance with the amended terms of the SERP. Subsequent to the amendment, there are no employees that would be considered actively participating under the terms of the SERP.
As a result, during the three and six months ended August 1, 2015, the Company included an actuarial gain of $11.4 million before taxes in accumulated other comprehensive income (loss). In addition, the Company also recognized a curtailment gain of $1.7 million before taxes related to the accelerated amortization of the remaining prior service credit during the three and six months ended August 1, 2015.
As a non-qualified pension plan, no dedicated funding of the SERP is required; however, the Company has made 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, if any, may vary depending on investment performance of the trust. The cash surrender values of the insurance policies were $55.9 million and $53.6 million as of August 1, 2015 and January 31, 2015, 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 (losses) of $(0.3) million and $1.6 million in other income and expense during the three and six months ended August 1, 2015, respectively, and unrealized gains of $0.7 million and $2.2 million in other income during the three and six months ended August 2, 2014, respectively. During the six months ended August 1, 2015, the Company also recorded realized gains of $0.7 million in other income resulting from payout on the insurance policies. The realized gains were recorded during the three months ended May 2, 2015. The projected benefit obligation was $50.6 million and $61.9 million as of August 1, 2015 and January 31, 2015, 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 $0.4 million and $0.8 million were made during the three and six months ended August 1, 2015, respectively. SERP benefit payments of $0.3 million were made during the three and six months ended August 2, 2014.

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The components of net periodic defined benefit pension (credit) cost for the three and six months ended August 1, 2015 and August 2, 2014 related to the SERP are as follows (in thousands):    
 
Three Months Ended
 
Six Months Ended
 
Aug 1, 2015
 
Aug 2, 2014
 
Aug 1, 2015
 
Aug 2, 2014
Interest cost
$
495

 
$
572

 
$
991

 
$
1,144

Net amortization of unrecognized prior service credit
(39
)
 
(58
)
 
(97
)
 
(116
)
Net amortization of actuarial losses
290

 
235

 
718

 
469

Curtailment gain
(1,651
)
 

 
(1,651
)
 

Net periodic defined benefit pension (credit) cost
$
(905
)
 
$
749

 
$
(39
)
 
$
1,497

Swiss Pension Plan
In accordance with local regulations, the Company also maintains a pension plan in Switzerland for certain of its employees. The plan is a government-mandated defined contribution plan that provides employees with a minimum investment return determined annually by the Swiss government, and as such, is treated under pension accounting in accordance with authoritative guidance. Under the plan, both the Company and certain of its employees with annual earnings in excess of government determined amounts are required to make contributions into a fund managed by an independent investment fiduciary. The Company’s contributions must be made in an amount at least equal to the employee’s contribution. Minimum employee contributions are based on the respective employee’s age, salary and gender. As of August 1, 2015 and January 31, 2015, the plan had a projected benefit obligation of CHF14.5 million (US$15.0 million) and CHF13.9 million (US$15.1 million), respectively, and plan assets held at the independent investment fiduciary of CHF12.1 million (US$12.5 million) and CHF11.5 million (US$12.5 million), respectively. The net liability of CHF2.4 million (US$2.5 million) and CHF2.4 million (US$2.6 million) was included in other long-term liabilities in the Company’s condensed consolidated balance sheets as of August 1, 2015 and January 31, 2015, respectively. During the three and six months ended August 1, 2015, the Company recognized net periodic defined benefit pension cost of CHF0.4 million (US$0.5 million) and CHF0.9 million (US$0.9 million), respectively, resulting from service cost and net amortization of actuarial losses related to the Swiss pension plan.
(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.

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The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of August 1, 2015 and January 31, 2015 (in thousands):
 
 
Fair Value Measurements at Aug 1, 2015
 
Fair Value Measurements at Jan 31, 2015
Recurring Fair Value Measures
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange currency contracts
 
$

 
$
8,446

 
$

 
$
8,446

 
$

 
$
15,542

 
$

 
$
15,542

Available-for-sale securities
 
23

 

 

 
23

 
36

 

 

 
36

Total
 
$
23

 
$
8,446

 
$

 
$
8,469

 
$
36

 
$
15,542

 
$

 
$
15,578

Liabilities:
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Foreign exchange currency contracts
 
$

 
$
207

 
$

 
$
207

 
$

 
$

 
$

 
$

Interest rate swap
 

 
165

 

 
165

 

 
270

 

 
270

Deferred compensation obligations
 

 
11,213

 

 
11,213

 

 
9,133

 

 
9,133

Total
 
$

 
$
11,585

 
$

 
$
11,585

 
$

 
$
9,403

 
$

 
$
9,403

 
There were no transfers of financial instruments between the three levels of fair value hierarchy during the six months ended August 1, 2015 or during the year ended January 31, 2015.
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, which consist of marketable equity securities, are recorded at fair value and are included in other assets in the accompanying condensed consolidated balance sheets. As of August 1, 2015 and January 31, 2015, available-for-sale securities were minimal. Unrealized gains (losses), net of taxes, are included as a component of stockholders equity and comprehensive income (loss). As of August 1, 2015 and January 31, 2015, the accumulated unrealized losses, net of taxes, included in accumulated other comprehensive income (loss) related to available-for-sale securities owned by the Company were minimal. During the six months ended August 2, 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 3, 2014. The cost of securities sold was based on the specific identification method. Gains recognized during the six months ended August 2, 2014 were $0.1 million as a result of this sale and were included in other income.
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. As of August 1, 2015 and January 31, 2015, 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. 

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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 or concession as an asset group for impairment testing, which is the lowest level at which individual cash flows can be identified. The asset group includes leasehold improvements, furniture, fixtures and equipment, computer hardware and software and certain long-term security deposits and lease acquisition costs. The Company reviews retail locations in penetrated markets for impairment risk once the locations have been opened for at least one year in their current condition, or sooner as changes in circumstances require. The Company believes that waiting one year allows a store or concession to reach a maturity level where a more comprehensive analysis of financial performance can be performed. The Company evaluates impairment risk for retail locations in new markets, where the Company is in the early stages of establishing its presence, once the locations have been opened for at least two years. The Company believes that waiting two years allows for brand awareness to be established. The Company also evaluates impairment risk for retail locations that are expected to be closed in the foreseeable future.
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 and concession assets are based on managements estimates of future cash flows over the remaining lease period or expected life, if shorter. For expected store and concession closures, the Company will evaluate whether it is necessary to shorten the useful life for any of the assets within the respective asset group. The Company will use this revised useful life when estimating the asset group’s future cash flows. The Company considers historical trends, expected future business trends and other factors when estimating the future cash flow for each retail location. The Company also considers factors such as: the local environment for each retail 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 $0.7 million and $1.8 million during the three and six months ended August 1, 2015, respectively, and $4.6 million and $4.8 million during the three and six months ended August 2, 2014, respectively. The impairment charges related primarily to the impairment of certain retail stores in North America and Europe resulting from under-performance or the exercise of kick-out options during each of the respective periods. These impairment charges were included in selling, general and administrative expenses in the Company’s condensed consolidated statements of income for each of the respective periods.
(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, South Korea and Mexico are

23

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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, tax liabilities and pension-related 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 August 1, 2015, 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.
The Company has also used U.S. dollar forward contracts 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 August 1, 2015 and January 31, 2015 is as follows (in thousands):
 
 
Derivative
Balance Sheet
Location
 
Fair Value at
Aug 1, 2015
 
Fair Value at
Jan 31, 2015
ASSETS:
 
 
 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts:
 
 
 
 
 
 
   Cash flow hedges
 
Other current assets/
Other assets
 
$
4,454

 
$
6,597

Derivatives not designated as hedging instruments:
 
 
 
 
 
 

Foreign exchange currency contracts
 
Other current assets
 
3,992

 
8,945

Total
 
 
 
$
8,446

 
$
15,542

LIABILITIES:
 
 
 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts:
 
 
 
 
 
 
   Cash flow hedges
 
Accrued expenses
 
$
76

 
$

Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts
 
Accrued expenses
 
131

 

Interest rate swaps
 
Accrued expenses/
Other long-term liabilities
 
165

 
270

Total derivatives not designated as hedging instruments
 
 
 
296

 
270

Total
 
 
 
$
372

 
$
270

Derivatives Designated as Hedging Instruments
Cash Flow Hedges
During the six months ended August 1, 2015, the Company purchased U.S. dollar forward contracts in Europe and Canada totaling US$82.2 million and US$43.8 million, respectively, to hedge forecasted merchandise purchases and intercompany royalties that were designated as cash flow hedges. As of August 1, 2015, the Company had forward contracts outstanding for its European and Canadian operations of US$92.9 million and US$43.8 million, respectively, which are expected to mature over the next 18 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 six months ended August 1, 2015 and August 2, 2014 (in thousands): 
 
Gain
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
 
 
Three Months Ended
 
Aug 1, 2015
 
Aug 2, 2014
 
 
Aug 1, 2015
 
Aug 2, 2014
Derivatives designated as cash flow hedges:
 

 
 

 
 
 
 

 
 

Foreign exchange currency contracts
$
5,343

 
$
1,866

 
Cost of product sales
 
$
3,193

 
$
(265
)
Foreign exchange currency contracts
$
378

 
$
1

 
Other income/expense
 
$
330

 
$
(25
)
 
Gain (Loss)
Recognized in
OCI
 
Location of
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings(1)
 
Gain (Loss)
Reclassified from
Accumulated OCI into
Earnings
 
Six Months Ended
 
 
Six Months Ended
 
Aug 1, 2015
 
Aug 2, 2014
 
 
Aug 1, 2015
 
Aug 2, 2014
Derivatives designated as cash flow hedges:
 

 
 

 
 
 
 

 
 

Foreign exchange currency contracts
$
4,196

 
$
(706
)
 
Cost of product sales
 
$
4,943

 
$
(759
)
Foreign exchange currency contracts
$
230

 
$
(106
)
 
Other income/expense
 
$
816

 
$
(56
)
 __________________________________
(1)
The ineffective portion was immaterial during the three and six months ended August 1, 2015 and August 2, 2014 and was recorded in net earnings and included in interest income/expense.
As of August 1, 2015, accumulated other comprehensive income (loss) included a net unrealized gain of approximately $5.9 million, net of tax, of which $4.6 million 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
 
Six Months Ended
 
Aug 1, 2015
 
Aug 2, 2014
 
Aug 1, 2015
 
Aug 2, 2014
Beginning balance gain (loss)
$
4,296

 
$
(1,667
)
 
$
7,157

 
$
(113
)
Net gains (losses) from changes in cash flow hedges
4,584