Document
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 July 30, 2016
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 August 29, 2016 the registrant had 84,376,162 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) 
 
Jul 30,
2016
 
Jan 30,
2016
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
415,499

 
$
445,480

Accounts receivable, net
201,260

 
222,359

Inventories
379,748

 
311,704

Other current assets
55,831

 
56,709

Total current assets
1,052,338

 
1,036,252

Property and equipment, net
271,512

 
255,344

Goodwill
34,162

 
33,412

Other intangible assets, net
7,196

 
7,269

Deferred tax assets
89,256

 
83,613

Other assets
120,552

 
122,858

 
$
1,575,016

 
$
1,538,748

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of borrowings and capital lease obligations
$
555

 
$
4,024

Accounts payable
201,992

 
177,505

Accrued expenses
135,929

 
145,530

Total current liabilities
338,476

 
327,059

Long-term debt
23,639

 
2,318

Deferred rent and lease incentives
78,870

 
76,968

Other long-term liabilities
102,289

 
95,858

 
543,274

 
502,203

Redeemable noncontrolling interests
3,941

 
5,252

 
 
 
 
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 140,556,666 and 140,028,937 shares, outstanding 84,386,548 and 83,833,937 shares, as of July 30, 2016 and January 30, 2016, respectively
844

 
838

Paid-in capital
475,476

 
468,574

Retained earnings
1,237,935

 
1,269,775

Accumulated other comprehensive loss
(137,214
)
 
(158,054
)
Treasury stock, 56,170,118 and 56,195,000 shares as of July 30, 2016 and January 30, 2016, respectively
(562,409
)
 
(562,658
)
Guess?, Inc. stockholders’ equity
1,014,632

 
1,018,475

Nonredeemable noncontrolling interests
13,169

 
12,818

Total stockholders’ equity
1,027,801

 
1,031,293

 
$
1,575,016

 
$
1,538,748

 
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
 
Jul 30,
2016
 
Aug 1,
2015
 
Jul 30,
2016
 
Aug 1,
2015
Product sales
$
523,008

 
$
520,937

 
$
949,476

 
$
973,896

Net royalties
21,951

 
25,327

 
44,298

 
51,192

Net revenue
544,959

 
546,264

 
993,774

 
1,025,088

Cost of product sales
359,327

 
348,147

 
665,383

 
661,486

Gross profit
185,632

 
198,117

 
328,391

 
363,602

Selling, general and administrative expenses
170,055

 
171,916

 
335,709

 
333,048

Restructuring charges

 

 
6,083

 

Earnings (loss) from operations
15,577

 
26,201

 
(13,401
)
 
30,554

Other income (expense):
 

 
 

 
 
 
 
Interest expense
(458
)
 
(729
)
 
(978
)
 
(1,164
)
Interest income
251

 
239

 
902

 
511

Other income, net
27,390

 
3,708

 
26,292

 
6,334

 
27,183

 
3,218

 
26,216

 
5,681

 
 
 
 
 
 
 
 
Earnings before income tax expense
42,760

 
29,419

 
12,815

 
36,235

Income tax expense
10,593

 
10,940

 
5,802

 
13,769

Net earnings
32,167

 
18,479

 
7,013

 
22,466

Net earnings (loss) attributable to noncontrolling interests
(102
)
 
190

 
(78
)
 
836

Net earnings attributable to Guess?, Inc.
$
32,269

 
$
18,289

 
$
7,091

 
$
21,630

 
 
 
 
 
 
 
 
Net earnings per common share attributable to common stockholders (Note 2):
Basic
$
0.38

 
$
0.21

 
$
0.08

 
$
0.25

Diluted
$
0.38

 
$
0.21

 
$
0.08

 
$
0.25

 
 
 
 
 
 
 
 
Weighted average common shares outstanding attributable to common stockholders (Note 2):
Basic
83,621

 
85,004

 
83,567

 
84,985

Diluted
83,863

 
85,290

 
83,809

 
85,132

 
 
 
 
 
 
 
 
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
 
Jul 30,
2016
 
Aug 1,
2015
 
Jul 30,
2016
 
Aug 1,
2015
Net earnings
$
32,167

 
$
18,479

 
$
7,013

 
$
22,466

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

 
 

 
 
 
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
Gains (losses) arising during the period
(15,722
)
 
(20,933
)
 
27,430

 
(21,636
)
Derivative financial instruments designated as cash flow hedges
 

 
 

 
 
 
 
Gains (losses) arising during the period
5,420

 
5,721

 
(6,823
)
 
4,426

Less income tax effect
(803
)
 
(1,137
)
 
1,560

 
(768
)
Reclassification to net earnings for gains realized
(1,131
)
 
(3,523
)
 
(2,547
)
 
(5,759
)
Less income tax effect
250

 
511

 
521

 
812

Marketable securities
 

 
 

 
 
 
 
Losses arising during the period
(5
)
 
(7
)
 
(4
)
 
(14
)
Less income tax effect
3

 
3

 
3

 
6

Defined benefit plans
 

 
 

 
 
 
 
Actuarial gain

 
11,378

 

 
11,378

Foreign currency and other adjustments
28

 

 
(136
)
 

Less income tax effect
(2
)
 
(4,352
)
 
13

 
(4,352
)
Actuarial loss amortization
85

 
430

 
171

 
943

Prior service credit amortization
(7
)
 
(39
)
 
(14
)
 
(97
)
Curtailment

 
(1,651
)
 

 
(1,651
)
Less income tax effect
(19
)
 
522

 
(38
)
 
373

Total comprehensive income
20,264

 
5,402

 
27,149

 
6,127

Less comprehensive income (loss) attributable to noncontrolling interests:
 

 
 

 
 
 
 
Net earnings (loss)
(102
)
 
190

 
(78
)
 
836

Foreign currency translation adjustment
(1,225
)
 
(236
)
 
(704
)
 
(600
)
Amounts attributable to noncontrolling interests
(1,327
)
 
(46
)
 
(782
)
 
236

Comprehensive income attributable to Guess?, Inc.
$
21,591

 
$
5,448

 
$
27,931

 
$
5,891


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
 
Jul 30,
2016
 
Aug 1,
2015
Cash flows from operating activities:
 

 
 

Net earnings
$
7,013

 
$
22,466

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

 
 

Depreciation and amortization of property and equipment
33,105

 
35,363

Amortization of intangible assets
944

 
1,080

Share-based compensation expense
9,049

 
8,052

Unrealized forward contract (gains) losses
1,181

 
(1,979
)
Net gains on disposition of long-term assets and property and equipment
(21,374
)
 
(171
)
Other items, net
(1,082
)
 
167

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
18,873

 
12,943

Inventories
(61,357
)
 
(21,791
)
Prepaid expenses and other assets
(6,718
)
 
(5,624
)
Accounts payable and accrued expenses
2,281

 
18,432

Deferred rent and lease incentives
1,183

 
(2,455
)
Other long-term liabilities
(706
)
 
(9,747
)
Net cash provided by (used in) operating activities
(17,608
)
 
56,736

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(44,223
)
 
(24,963
)
Proceeds from sale of long-term assets
43,399

 

Changes in other assets

 
1,768

Acquisition of businesses, net of cash acquired
(372
)
 
(846
)
Net cash settlement of forward contracts
357

 
6,814

Net cash used in investing activities
(839
)
 
(17,227
)
Cash flows from financing activities:
 

 
 

Payment of debt issuance costs
(111
)
 
(945
)
Proceeds from borrowings
21,500

 
581

Repayment of capital lease obligations and borrowings
(4,468
)
 
(756
)
Dividends paid
(38,383
)
 
(38,520
)
Purchase of redeemable noncontrolling interest
(4,445
)
 

Noncontrolling interest capital contributions
2,157

 

Noncontrolling interest capital distributions

 
(3,830
)
Issuance of common stock, net of tax withholdings on vesting of stock awards
346

 
(1,052
)
Excess tax benefits from share-based compensation
202

 
79

Net cash used in financing activities
(23,202
)
 
(44,443
)
Effect of exchange rates on cash and cash equivalents
11,668

 
(7,603
)
Net change in cash and cash equivalents
(29,981
)
 
(12,537
)
Cash and cash equivalents at the beginning of the year
445,480

 
483,483

Cash and cash equivalents at the end of the period
$
415,499

 
$
470,946

 
 
 
 
Supplemental cash flow data:
 

 
 

Interest paid
$
607

 
$
508

Income taxes paid
$
9,132

 
$
14,590

 
See accompanying notes to condensed consolidated financial statements.

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GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 30, 2016
(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 July 30, 2016 and January 30, 2016, the condensed consolidated statements of income and comprehensive income for the three and six months ended July 30, 2016 and August 1, 2015 and the condensed consolidated statements of cash flows for the six months ended July 30, 2016 and August 1, 2015. 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 July 30, 2016 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 30, 2016.
The three and six months ended July 30, 2016 had the same number of days as the three and six months ended August 1, 2015. All references herein to “fiscal 2017,” “fiscal 2016” and “fiscal 2015” represent the results of the 52-week fiscal year ending January 28, 2017 and the 52-week fiscal years ended January 30, 2016 and January 31, 2015, respectively. 
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.
Sale of Other Assets
On May 30, 2016, the Company sold its minority interest equity holding in a privately-held boutique apparel company for net proceeds of approximately $34.8 million, which resulted in a gain of approximately $22.3 million which was recorded in other income during the second quarter of fiscal 2017.
New Accounting Guidance
Changes in Accounting Policies
In February 2015, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance which modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The Company adopted this guidance effective January 31, 2016. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
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. The Company adopted this guidance effective January 31, 2016. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
In April 2015, the FASB issued authoritative guidance which provides clarification on accounting for cloud computing arrangements which include a software license. The Company adopted this guidance effective January 31, 2016. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
In May 2015, the FASB issued authoritative guidance which eliminates the disclosure requirement to categorize investments within the fair value hierarchy that are measured at fair value using the net asset value

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Table of Contents

per share practical expedient. The Company adopted this guidance effective January 31, 2016. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
In September 2015, the FASB issued authoritative guidance that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. The Company adopted this guidance effective January 31, 2016. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
Recently Issued Accounting Guidance
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. During the first half of fiscal 2017, the FASB issued additional clarification guidance on the new revenue recognition standard which also included certain scope improvements and practical expedients. The standard (including clarification guidance issued) 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 and related disclosures, including the choice of application method upon adoption.
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.
In January 2016, the FASB issued authoritative guidance which requires equity investments not accounted for under the equity method of accounting or consolidation accounting to be measured at fair value, with subsequent changes in fair value recognized in net income. This guidance also addresses other recognition, measurement, presentation and disclosure requirements for financial instruments. This guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize assets and liabilities related to long-term leases that were classified as operating leases under previous guidance in its balance sheet. An asset would be recognized related to the right to use the underlying asset and a liability would be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases. The standard is effective for fiscal periods beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020, and requires 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 and related disclosures, but expects there will be a significant increase in its long-term assets and liabilities resulting from the adoption.
In March 2016, the FASB issued authoritative guidance to simplify the accounting for certain aspects of share-based compensation. This guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. This guidance also addresses other recognition, measurement and

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presentation requirements for share-based compensation. This guidance is effective for fiscal years beginning after December 15, 2016, which will be the Company’s first quarter of fiscal 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued authoritative guidance related to the measurement of credit losses on financial instruments. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021. Early adoption is permitted for fiscal periods beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued authoritative guidance related to the classification of certain cash receipts and cash payments in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, which will be the Company’s first quarter of fiscal 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and 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 Company has granted 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 weighted average number of common shares outstanding and 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 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.

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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
 
Jul 30, 2016
 
Aug 1, 2015
 
Jul 30, 2016
 
Aug 1, 2015
Net earnings attributable to Guess?, Inc.
$
32,269

 
$
18,289

 
$
7,091

 
$
21,630

Less net earnings attributable to nonvested restricted stockholders
240

 
143

 
286

 
227

Net earnings attributable to common stockholders
$
32,029

 
$
18,146

 
$
6,805

 
$
21,403

 
 
 
 
 
 
 
 
Weighted average common shares used in basic computations
83,621

 
85,004

 
83,567

 
84,985

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options and restricted stock units
242

 
286

 
242

 
147

Weighted average common shares used in diluted computations
83,863

 
85,290

 
83,809

 
85,132

 
 
 
 
 
 
 
 
Net earnings per common share attributable to common stockholders:
Basic
$
0.38

 
$
0.21

 
$
0.08

 
$
0.25

Diluted
$
0.38

 
$
0.21

 
$
0.08

 
$
0.25

For the three months ended July 30, 2016 and August 1, 2015, equity awards granted for 3,426,266 and 2,525,300, respectively, of the Company’s common shares and for the six months ended July 30, 2016 and August 1, 2015, equity awards granted for 3,185,000 and 2,473,325, respectively, of the Company’s common shares were outstanding but were excluded from the computation of diluted weighted average common shares and common equivalent shares 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 July 30, 2016, the Company also excluded 602,816 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 equivalent shares outstanding because these conditions were not achieved as of July 30, 2016. For the three and six months ended August 1, 2015, the Company excluded 425,866 nonvested stock units which were subject to the achievement of performance-based or market-based vesting conditions from the computation of diluted weighted average common shares and common equivalent shares outstanding because these conditions were not achieved as of August 1, 2015.
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. 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 July 30, 2016, the Company had remaining authority under the program to purchase $451.8 million of its common stock. There were no share repurchases during the three and six months ended July 30, 2016 and August 1, 2015.

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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 30, 2016 and six months ended July 30, 2016 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 January 31, 2015
85,323,154

 
54,235,846

 
$
1,073,856

 
$
15,590

 
$
1,089,446

 
$
4,437

Net earnings

 

 
81,851

 
2,964

 
84,815

 

Foreign currency translation adjustment

 

 
(36,083
)
 
(1,661
)
 
(37,744
)
 
(476
)
Gain on derivative financial instruments designated as cash flow hedges, net of income tax of ($559)

 

 
95

 

 
95

 

Loss on marketable securities, net of income tax of $7

 

 
(12
)
 

 
(12
)
 

Actuarial valuation gain (loss) and related amortization, plan amendment, curtailment, prior service credit amortization and foreign currency and other adjustments on defined benefit plans, net of income tax of ($2,972)

 

 
5,011

 

 
5,011

 

Issuance of common stock under stock compensation plans, net of tax effect
469,937

 

 
(4,023
)
 

 
(4,023
)
 

Issuance of stock under Employee Stock Purchase Plan
40,846

 
(40,846
)
 
660

 

 
660

 

Share-based compensation

 

 
18,880

 

 
18,880

 

Dividends

 

 
(77,287
)
 

 
(77,287
)
 

Share repurchases
(2,000,000
)
 
2,000,000

 
(44,053
)
 

 
(44,053
)
 

Noncontrolling interest capital contribution

 

 

 

 

 
871

Noncontrolling interest capital distribution

 

 

 
(4,075
)
 
(4,075
)
 

Redeemable noncontrolling interest redemption value adjustment

 

 
(420
)
 

 
(420
)
 
420

Balance at January 30, 2016
83,833,937

 
56,195,000

 
$
1,018,475

 
$
12,818

 
$
1,031,293

 
$
5,252

Net earnings (loss)

 

 
7,091

 
(78
)
 
7,013

 

Foreign currency translation adjustment

 

 
28,134

 
(704
)
 
27,430

 
307

Loss on derivative financial instruments designated as cash flow hedges, net of income tax of $2,081

 

 
(7,289
)
 

 
(7,289
)
 

Loss on marketable securities, net of income tax of $3

 

 
(1
)
 

 
(1
)
 

Actuarial valuation and prior service credit amortization and foreign currency and other adjustments on defined benefit plans, net of income tax of ($25)

 

 
(4
)
 

 
(4
)
 

Issuance of common stock under stock compensation plans, net of tax effect
527,729

 

 
(940
)
 

 
(940
)
 

Issuance of stock under Employee Stock Purchase Plan
24,882

 
(24,882
)
 
342

 

 
342

 

Share-based compensation

 

 
9,049

 

 
9,049

 

Dividends

 

 
(38,422
)
 

 
(38,422
)
 

Purchase of redeemable noncontrolling interest

 

 
(1,133
)
 
1,133

 

 
(4,445
)
Noncontrolling interest capital contribution

 

 

 

 

 
2,157

Redeemable noncontrolling interest redemption value adjustment

 

 
(670
)
 

 
(670
)
 
670

Balance at July 30, 2016
84,386,548

 
56,170,118

 
$
1,014,632

 
$
13,169

 
$
1,027,801

 
$
3,941


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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 six months ended July 30, 2016 and August 1, 2015 are as follows (in thousands):
 
Three Months Ended Jul 30, 2016
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
Defined Benefit Plans
 
Total
Balance at April 30, 2016
$
(115,021
)
 
$
(3,773
)
 
$
(14
)
 
$
(7,728
)
 
$
(126,536
)
Gains (losses) arising during the period
(14,497
)
 
4,617

 
(2
)
 
26

 
(9,856
)
Reclassification to net earnings for (gains) losses realized

 
(881
)
 

 
59

 
(822
)
Net other comprehensive income (loss)
(14,497
)
 
3,736

 
(2
)
 
85

 
(10,678
)
Balance at July 30, 2016
$
(129,518
)
 
$
(37
)
 
$
(16
)
 
$
(7,643
)
 
$
(137,214
)
 
Six Months Ended Jul 30, 2016
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
Defined Benefit Plans
 
Total
Balance at January 30, 2016
$
(157,652
)
 
$
7,252

 
$
(15
)
 
$
(7,639
)
 
$
(158,054
)
Gains (losses) arising during the period
28,134

 
(5,263
)
 
(1
)
 
(123
)
 
22,747

Reclassification to net earnings for (gains) losses realized

 
(2,026
)
 

 
119

 
(1,907
)
Net other comprehensive income (loss)
28,134

 
(7,289
)
 
(1
)
 
(4
)
 
20,840

Balance at July 30, 2016
$
(129,518
)
 
$
(37
)
 
$
(16
)
 
$
(7,643
)
 
$
(137,214
)
 
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
)


10

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Details on reclassifications out of accumulated other comprehensive income (loss) to net earnings during the three and six months ended July 30, 2016 and August 1, 2015 are as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
Location of
(Gain) Loss
Reclassified from
Accumulated OCI
into Earnings
 
Jul 30, 2016
 
Aug 1, 2015
 
Jul 30, 2016
 
Aug 1, 2015
 
Derivative financial instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
   Foreign exchange currency contracts
$
(1,141
)
 
$
(3,193
)
 
$
(2,576
)
 
$
(4,943
)
 
Cost of product sales
   Foreign exchange currency contracts
(49
)
 
(330
)
 
(81
)
 
(816
)
 
Other income/expense
   Interest rate swap
59

 

 
110

 

 
Interest expense
      Less income tax effect
250

 
511

 
521

 
812

 
Income tax expense
 
(881
)
 
(3,012
)
 
(2,026
)
 
(4,947
)
 
 
Defined benefit plans:
 
 
 
 
 
 
 
 
 
   Actuarial loss amortization
85

 
430

 
171

 
943

 
(1) 
   Prior service credit amortization
(7
)
 
(39
)
 
(14
)
 
(97
)
 
(1) 
   Curtailment

 
(1,651
)
 

 
(1,651
)
 
(1) 
      Less income tax effect
(19
)
 
522

 
(38
)
 
373

 
Income tax expense
 
59

 
(738
)
 
119

 
(432
)
 
 
Total reclassifications during the period
$
(822
)
 
$
(3,750
)
 
$
(1,907
)
 
$
(5,379
)
 
 
__________________________________
(1)
These accumulated other comprehensive income (loss) components are included in the computation of net periodic defined benefit pension (credit) 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 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 and is classified as a redeemable noncontrolling interest outside of permanent equity in the Company’s condensed consolidated balance sheet. During the six months ended July 30, 2016, the Company and the noncontrolling interest holder increased their capital contributions by $1.7 million, of which $1.0 million was paid by the Company and the remaining amount was paid by the noncontrolling interest holder to retain the same pro-rata interest in Guess Brazil. The carrying value of the redeemable noncontrolling interest related to Guess Brazil was $1.6 million and $0.7 million as of July 30, 2016 and January 30, 2016, respectively.
During fiscal 2016, the Company entered into a new majority-owned joint venture to establish Guess? CIS, LLC (“Guess CIS”) which is based in Russia. The Company made an initial contribution of $2.0 million to obtain a 70% interest in Guess CIS and is party to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest. During the six months ended July 30, 2016, the Company and the noncontrolling interest holder increased their capital contributions by $5.0 million, of which $3.5 million was paid by the Company and the remaining amount was paid by the noncontrolling interest holder to retain the same pro-rata interest in Guess CIS. The put arrangement may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company during the period beginning after the fifth anniversary of the agreement through December 31, 2025, or sooner in certain limited circumstances. The redemption value of the Guess CIS put arrangement is based on a multiple of Guess CIS’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments and is classified as a redeemable noncontrolling interest outside of permanent equity in the Company’s condensed consolidated balance sheet. The carrying value of the redeemable

11

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noncontrolling interest related to Guess CIS was $2.3 million and $0.9 million as of July 30, 2016 and January 30, 2016, respectively.
The Company was previously party to a put arrangement in connection with its now wholly-owned subsidiary, Guess Sud SAS (“Guess Sud”). Under the terms of this put arrangement, which represented 40% of the total outstanding interest of that subsidiary, the noncontrolling interest holder had the option to exercise the put arrangement at its discretion by providing written notice to the Company any time after January 30, 2012. The redemption value of the put arrangement was determined based on a method which approximated fair value. In May 2016, the Company acquired the remaining 40% interest in Guess Sud for $4.4 million. At January 30, 2016, the redemption value related to the Guess Sud put arrangement was $3.7 million and was included in redeemable noncontrolling interests.
(4)
Accounts Receivable
Accounts receivable is summarized as follows (in thousands):
 
Jul 30, 2016
 
Jan 30, 2016
Trade
$
213,348

 
$
222,972

Royalty
13,594

 
16,443

Other
8,392

 
16,493

 
235,334

 
255,908

Less allowances
34,074

 
33,549

 
$
201,260

 
$
222,359

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):
 
Jul 30, 2016
 
Jan 30, 2016
Raw materials
$
1,445

 
$
1,150

Work in progress
134

 
92

Finished goods
378,169

 
310,462

 
$
379,748

 
$
311,704

The above balances include an allowance to write down inventories to the lower of cost or market of $19.6 million and $15.9 million as of July 30, 2016 and January 30, 2016, respectively.
(6)
Restructuring Charges
During the first quarter of fiscal 2017, the Company implemented a global cost reduction and restructuring plan to better align its global cost and organizational structure with its current strategic initiatives. This plan included the consolidation and streamlining of the Company’s business processes and a reduction in its global workforce and other expenses. These actions resulted in restructuring charges related primarily to cash-based severance costs of $6.1 million during the six months ended July 30, 2016. There were no restructuring charges incurred during the three months ended July 30, 2016 related to this plan. The Company does not expect significant future cash-based severance charges to be incurred as the actions under this plan were substantially completed during the first quarter of fiscal 2017. As of July 30, 2016, the Company had a balance of approximately $1.1 million in accrued expenses for amounts expected to be paid during the remainder of fiscal 2017.

12

Table of Contents

The following table summarizes restructuring activities related primarily to severance during the three and six months ended July 30, 2016 (in thousands):
 
Three Months Ended
 
Jul 30, 2016
Balance at April 30, 2016
$
5,146

Cash payments
(3,906
)
Foreign currency and other adjustments
(109
)
Balance at July 30, 2016
$
1,131

 
Six Months Ended
 
Jul 30, 2016
Balance at January 30, 2016
$

Charges to operations
6,083

Cash payments
(4,836
)
Foreign currency and other adjustments
(116
)
Balance at July 30, 2016
$
1,131

During the six months ended July 30, 2016, the Company also incurred an estimated exit tax charge of approximately $1.9 million related to its reorganization in Europe as a result of the global cost reduction and restructuring plan. The estimated exit tax charge was recorded during the three months ended April 30, 2016. The exit tax charge has not been finalized with the local authorities and actual amounts could differ significantly from these estimates as negotiations are completed.
(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 45.3% for the six months ended July 30, 2016 compared to 38.0% for the six months ended August 1, 2015. The increase in the effective income tax rate was due primarily to more losses incurred in certain foreign jurisdictions where the Company has valuation allowances and a shift in the distribution of earnings among the Company’s tax jurisdictions within the quarters of the current fiscal year, partially offset by the favorable impact of a lower tax rate on the gain from the sale of a minority interest investment during the six months ended July 30, 2016 compared to the same prior-year period.
From time-to-time, the Company is subject to routine income tax audits on various tax matters around the world in the ordinary course of business. As of July 30, 2016, 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 $17.4 million and $13.9 million as of July 30, 2016 and January 30, 2016, respectively. The change in the accrual balance from January 30, 2016 to July 30, 2016 resulted from additional accruals and interest and penalties during the six months ended July 30, 2016.
(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. 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

13

Table of Contents

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 retail, e-commerce and wholesale operations in Europe and the Middle East. The Asia segment includes the Company’s retail, e-commerce and wholesale 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.
Net revenue and earnings (loss) from operations are summarized as follows for the three and six months ended July 30, 2016 and August 1, 2015 (in thousands):    
 
Three Months Ended
 
Six Months Ended
 
Jul 30, 2016
 
Aug 1, 2015
 
Jul 30, 2016
 
Aug 1, 2015
Net revenue:
 

 
 

 
 
 
 
Americas Retail
$
226,550

 
$
232,456

 
$
430,711

 
$
446,705

Europe
213,467

 
199,375

 
348,847

 
336,772

Asia
53,247

 
56,745

 
107,376

 
120,780

Americas Wholesale
29,744

 
32,361

 
62,542

 
69,639

Licensing
21,951

 
25,327

 
44,298

 
51,192

Total net revenue
$
544,959

 
$
546,264

 
$
993,774

 
$
1,025,088

Earnings (loss) from operations:
 

 
 

 
 
 
 
Americas Retail
$
(1,614
)
 
$
5,244

 
$
(14,215
)
 
$
(1,965
)
Europe
19,033

 
18,186

 
4,948

 
14,518

Asia
(3,546
)
 
887

 
(4,215
)
 
5,500

Americas Wholesale
3,339

 
4,872

 
8,950

 
11,619

Licensing
19,733

 
22,415

 
40,148

 
45,440

Corporate Overhead
(21,368
)
 
(25,403
)
 
(42,934
)
 
(44,558
)
Restructuring Charges

 

 
(6,083
)
 

Total earnings (loss) from operations
$
15,577

 
$
26,201

 
$
(13,401
)
 
$
30,554

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 six months ended July 30, 2016 related to plans to better align the Company’s global cost and organizational structure with its current strategic initiatives. 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):
 
Jul 30, 2016
 
Jan 30, 2016
Mortgage debt, maturing monthly through January 2026
$
21,162

 
$

European capital lease, matured quarterly through May 2016

 
4,024

Other
3,032

 
2,318

 
24,194

 
6,342

Less current installments
555

 
4,024

Long-term debt
$
23,639

 
$
2,318

Mortgage Debt
On February 16, 2016, the Company entered into a ten-year $21.5 million real estate secured loan (the “Mortgage Debt”). The Mortgage Debt is secured by the Company’s U.S. distribution center based in Louisville, Kentucky and provides for monthly principal and interest payments based on a 25-year amortization schedule, with the remaining principal balance and any accrued and unpaid interest due at maturity. Outstanding principal

14

Table of Contents

balances under the Mortgage Debt bear interest at the one-month LIBOR rate plus 1.5%. As of July 30, 2016, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $21.2 million.
The Mortgage Debt requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if consolidated cash, cash equivalents and short term investment balances fall below certain levels. In addition, the Mortgage Debt contains customary covenants, including covenants that limit or restrict the Company’s ability to incur liens on the mortgaged property and enter into certain contractual obligations. Upon the occurrence of an event of default under the Mortgage Debt, the lender may terminate the Mortgage Debt and declare all amounts outstanding to be immediately due and payable. The Mortgage Debt 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.
On February 16, 2016, the Company also entered into a separate interest rate swap agreement, designated as a cash flow hedge, that resulted in a swap fixed rate of approximately 3.06%. This interest rate swap agreement matures in January 2026 and converts the nature of the Mortgage Debt from LIBOR floating-rate debt to fixed-rate debt. The fair value of the interest rate swap liability as of July 30, 2016 was approximately $0.7 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 July 30, 2016, the Company could have borrowed up to $148 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 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.
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 July 30, 2016, the Company had $0.7 million in outstanding standby letters of credit, $1.3 million in 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

15

Table of Contents

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 July 30, 2016, the Company could have borrowed up to $75.8 million under these agreements. As of July 30, 2016, the Company had no outstanding borrowings and $1.4 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 0.4% 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 $39.1 million that has a minimum net equity requirement, there are no other financial ratio covenants.
Capital Lease
The Company leased a building in Florence, Italy under a capital lease which provided for minimum lease payments through May 1, 2016, at which point, the title of the building was transferred to the Company. The Company had a separate interest rate swap agreement designated as a non-hedging instrument that converted the nature of the capital lease obligation from Euribor floating-rate debt to fixed-rate debt and resulted in a swap fixed rate of 3.55%. This interest rate swap agreement matured on February 1, 2016.
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 six months ended July 30, 2016 and August 1, 2015 (in thousands): 
 
Three Months Ended
 
Six Months Ended
 
Jul 30, 2016
 
Aug 1, 2015
 
Jul 30, 2016
 
Aug 1, 2015
Stock options
$
622

 
$
439

 
$
1,134

 
$
920

Stock awards/units
4,146

 
3,950

 
7,824

 
7,037

Employee Stock Purchase Plan
49

 
51

 
91

 
95

Total share-based compensation expense
$
4,817

 
$
4,440

 
$
9,049

 
$
8,052

Unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested stock options and nonvested stock awards/units totaled approximately $4.6 million and $27.6 million, respectively, as of July 30, 2016. This cost is expected to be recognized over a weighted average period of 1.9 years. The weighted average grant date fair value of options granted was $3.55 and $3.71 during the six months ended July 30, 2016 and August 1, 2015, respectively. 
Grants
On April 29, 2016, the Company granted select key management 602,816 nonvested stock units which are subject to certain performance-based vesting or market-based vesting conditions.
On July 7, 2015, the Company granted Victor Herrero, the Company’s Chief Executive Officer, 600,000 stock options and 250,000 nonvested stock units in connection with an employment agreement entered into between the Company and Mr. Herrero (the “Herrero Employment Agreement”). Mr. Herrero was also granted 150,000 restricted stock units that were considered contingently returnable as a result of certain service conditions

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set forth in the Herrero Employment Agreement. These service conditions were met during the three months ending July 30, 2016.
Annual Grants
On March 30, 2016, the Company made an annual grant of 616,450 stock options and 442,000 nonvested stock awards/units to its employees. 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.
Performance-Based Awards
The Company has granted certain nonvested stock units subject to performance-based vesting conditions to select executive officers. Each award of nonvested stock units generally has an initial vesting period from the date of the grant through the end of the first fiscal year followed by annual vesting periods which may range from two-to-three years. 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 select key management, including certain executive officers. The number of shares that may ultimately vest with respect to each award may range from 0% up to 200% of the target number of shares, subject to the achievement of certain performance-based vesting conditions which may relate to the first fiscal year of the grant or the third fiscal year of the grant. Any shares that are ultimately issued are scheduled to vest at the end of the third fiscal year following the grant date.
The following table summarizes the activity for nonvested performance-based units during the six months ended July 30, 2016:
 
Number of
Units
 
Weighted
Average
Grant Date
Fair Value
Nonvested at January 30, 2016
580,000

 
$
22.65

Granted
462,359

 
18.35

Vested
(241,922
)
 
25.98

Forfeited

 

Nonvested at July 30, 2016
800,437

 
$
19.16

Market-Based Awards
The Company has granted certain nonvested stock units subject to market-based vesting conditions to select executive officers. 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.
The following table summarizes the activity for nonvested market-based units during the six months ended July 30, 2016:
 
Number of
Units
 
Weighted
Average
Grant Date
Fair Value
Nonvested at January 30, 2016
183,368

 
$
17.72

Granted
140,457

 
15.20

Vested

 

Forfeited

 

Nonvested at July 30, 2016
323,825

 
$
16.63


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(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 and member of the Board of the Company, and Maurice Marciano, Chairman Emeritus and member of the Board, 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 as of July 30, 2016 with expiration dates ranging from calendar years 2017 to 2020.
In January 2016, the Company sold an approximately 140,000 square foot parking lot located adjacent to the Company’s corporate headquarters to a partnership affiliated with the Marciano Trusts for a sales price of $7.5 million, which was subsequently collected during the six months ended July 30, 2016. Concurrent with the sale, the Company entered into a lease agreement to lease back the parking lot from the purchaser. During the fourth quarter of fiscal 2016, the Company recognized a net gain of approximately $3.4 million in other income as a result of these transactions.
Aggregate rent, common area maintenance charges and property tax expense recorded under these four related party leases for the six months ended July 30, 2016 and August 1, 2015 was $2.5 million and $2.7 million, respectively. The Company believes that the terms of the related party leases and parking lot sale 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 July 30, 2016 and August 1, 2015 were approximately $0.5 million and $0.3 million, respectively.
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 30, 2016.
(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 5% to 12%, when specific sales volumes are exceeded. The Company’s concession leases also provide for rents primarily based upon a percentage of annual sales volume which average approximately 34% of annual sales volume. 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 July 2021.
Investment Commitments
As of July 30, 2016, the Company had an unfunded commitment to invest €5.0 million ($5.6 million) in a private equity fund. The investment will be included in other assets in the Company’s condensed consolidated balance sheet when it is funded.

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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. That portion of the matter is now in a damages phase based on the ruling. On October 16, 2015, the plaintiff appealed the remainder of the Court of Appeal of Milan’s ruling in favor of the Company to the Italian Supreme Court of Cassation. 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. The Court issued a final order and judgment approving the settlement in February 2016.
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 ($11.0 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”). In May 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 ($1.9 million). In November 2015, the Italian Customs Agency notified the Company of its intent to appeal this first MFDTC judgment. During the first half of fiscal 2017, the MFDTC issued judgments in favor of the Company in relation to the second, third and fourth set of

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appeals (covering the period from October 2010 through June 2011), sixth set of appeals (covering the period from January 2012 through June 2012), as well as a portion of the seventh set of appeals (covering the period from August 2012 through December 2012) and canceled the related assessments totaling €6.0 million ($6.7 million). While these MFDTC judgments have been favorable to the Company, there can be no assurances that the Company’s remaining open appeals covering the periods from July 2011 through December 2011 as well as July 2012 will be successful. There also can be no assurances that the Italian Customs Agency will not be successful in its appeal of the first MFDTC judgment or that they will not appeal the other favorable MFDTC judgments. 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.
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 fiscal 2016, the SERP was amended in connection with Paul Marciano’s transition from Chief Executive Officer to Executive Chairman of the Board and Chief Creative Officer. This 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 this amendment, there are no employees considered actively participating under the terms of the SERP. As a result, the Company included an actuarial gain of $11.4 million before taxes in accumulated other comprehensive income (loss) during fiscal 2016. 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 fiscal 2016. The actuarial and curtailment gains were recorded during the three 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 $57.7 million and $52.5 million as of July 30, 2016 and January 30, 2016, 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 $1.9 million and $5.1 million in other income during the three and six months ended July 30, 2016, respectively, and 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. The Company also recorded realized gains of $0.1 million and $0.7 million in other income resulting from payout on the insurance policies during the six months ended July 30, 2016 and August 1, 2015, respectively. The realized gains were recorded during the three months ended April 30, 2016 and May 2, 2015. The projected benefit obligation was $53.5 million and $53.4 million as of July 30, 2016 and January 30, 2016, 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 July 30, 2016, respectively. SERP benefit payments of $0.4 million and $0.8 million were made during the three and six months ended August 1, 2015, respectively.

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The components of net periodic defined benefit pension (credit) cost for the three and six months ended July 30, 2016 and August 1, 2015 related to the SERP are as follows (in thousands):    
 
Three Months Ended
 
Six Months Ended
 
Jul 30, 2016
 
Aug 1, 2015
 
Jul 30, 2016
 
Aug 1, 2015
Interest cost
$
460

 
$
495

 
$
920

 
$
991

Net amortization of unrecognized prior service credit

 
(39
)
 

 
(97
)
Net amortization of actuarial losses
38

 
290

 
77

 
718

Curtailment gain

 
(1,651
)
 

 
(1,651
)
Net periodic defined benefit pension (credit) cost
$
498

 
$
(905
)
 
$
997

 
$
(39
)
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 July 30, 2016 and January 30, 2016, the plan had a projected benefit obligation of CHF16.0 million (US$16.5 million) and CHF15.6 million (US$15.2 million), respectively, and plan assets held at the independent investment fiduciary of CHF13.4 million (US$13.9 million) and CHF13.0 million (US$12.7 million), respectively. The net liability of CHF2.6 million (US$2.6 million) and CHF2.6 million (US$2.5 million) was included in other long-term liabilities in the Company’s condensed consolidated balance sheets as of July 30, 2016 and January 30, 2016, respectively. During the three and six months ended July 30, 2016, the Company recognized net periodic defined benefit pension cost of CHF0.4 million (US$0.4 million) and CHF0.8 million (US$0.8 million) respectively, resulting primarily from service cost. 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 primarily from service cost.
(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 July 30, 2016 and January 30, 2016 (in thousands):
 
 
Fair Value Measurements at Jul 30, 2016
 
Fair Value Measurements at Jan 30, 2016
Recurring Fair Value Measures
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange currency contracts
 
$

 
$
2,933

 
$

 
$
2,933

 
$

 
$
9,797

 
$

 
$
9,797

Available-for-sale securities
 
13

 

 

 
13

 
17

 

 

 
17

Total
 
$
13

 
$
2,933

 
$

 
$
2,946

 
$
17

 
$
9,797

 
$

 
$
9,814

Liabilities:
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Foreign exchange currency contracts
 
$

 
$
3,834

 
$

 
$
3,834

 
$

 
$
366

 
$

 
$
366

Interest rate swaps
 

 
706

 

 
706

 

 
37

 

 
37

Deferred compensation obligations
 

 
11,862

 

 
11,862

 

 
10,155

 

 
10,155

Total
 
$

 
$
16,402

 
$

 
$
16,402

 
$

 
$
10,558

 
$

 
$
10,558

 
There were no transfers of financial instruments between the three levels of fair value hierarchy during the six months ended July 30, 2016 or during the year ended January 30, 2016.
The fair values of the Companys available-for-sale securities are based on quoted prices. The fair values of the interest rate swaps are based upon inputs corroborated by observable market data. Foreign exchange currency 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 exchange currency 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 currency 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 July 30, 2016 and January 30, 2016, 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 July 30, 2016 and January 30, 2016, 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.
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 July 30, 2016 and January 30, 2016, the carrying value of all financial instruments was not materially different from fair value, as the interest rates on the Company’s debt 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 retail location 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 retail location 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

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of establishing its presence, once brand awareness has been 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 assets in retail locations are based on managements estimates of future cash flows over the remaining lease period or expected life, if shorter. For expected retail location 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 $0.5 million and $0.7 million during the three and six months ended July 30, 2016, respectively, and $0.7 million and $1.8 million during the three and six months ended August 1, 2015, respectively. The impairment charges related primarily to the impairment of certain retail locations in North America and Europe resulting from under-performance and expected store closures 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
Foreign Exchange Currency Contracts
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 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 currency 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 exchange currency contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries.

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Table of Contents

Interest Rate Swap Agreements
The Company is exposed to interest rate risk on its floating-rate debt. The Company has entered into interest rate swap agreements 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 floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Refer to Note 9 for further information. 
The impact of the credit risk of the counterparties to the derivative contracts is considered in determining the fair value of the foreign exchange currency contracts and interest rate swap agreements. As of July 30, 2016, credit risk has not had a significant effect on the fair value of the Company’s foreign exchange currency contracts and interest rate swap agreements.
Hedge Accounting Policy
Foreign Exchange Currency Contracts
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 exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net earnings as part of other income and expense.
Interest Rate Swap Agreements
Interest rate swap agreements are used to hedge the variability of the cash flows in interest payments associated with the Company’s floating-rate debt. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
Periodically, the Company may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements 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 July 30, 2016 and January 30, 2016 is as follows (in thousands):
 
 
Derivative
Balance Sheet
Location
 
Fair Value at
Jul 30, 2016
 
Fair Value at
Jan 30, 2016
ASSETS:
 
 
 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

Cash flow hedges:
 
 
 
 
 
 
   Foreign exchange currency contracts
 
Other current assets/
Other assets
 
$
2,002

 
$
7,491

Derivatives not designated as hedging instruments:
 
 
 
 
 
 

Foreign exchange currency contracts
 
Other current assets
 
931

 
2,306

Total
 
 
 
$
2,933

 
$
9,797

LIABILITIES:
 
 
 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

Cash flow hedges:
 
 
 
 
 
 
   Foreign exchange currency contracts
 
Accrued expenses/
Other long-term liabilities
 
$
2,036

 
$
47

   Interest rate swap
 
Other long-term liabilities
 
706

 

Total derivatives designated as hedging instruments
 
 
 
2,742

 
47

Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts
 
Accrued expenses
 
1,798

 
319

Interest rate swap
 
Accrued expenses
 

 
37

Total derivatives not designated as hedging instruments
 
 
 
1,798

 
356

Total
 
 
 
$
4,540

 
$
403

Derivatives Designated as Hedging Instruments
Foreign Exchange Currency Contracts Designated as Cash Flow Hedges
During the six months ended July 30, 2016, the Company purchased U.S. dollar forward contracts in Europe and Canada totaling US$46.7 million and US$35.9 million, respectively, to hedge forecasted merchandise purchases and intercompany royalties that were designated as cash flow hedges. As of July 30, 2016, the Company had forward contracts outstanding for its European and Canadian operations of US$106.4 million and US$60.6 million, respectively, which are expected to mature over the next 17 months.
As of July 30, 2016, accumulated other comprehensive income (loss) related to foreign exchange currency contracts included a net unrealized gain of approximately $0.4 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.
At January 30, 2016, the Company had forward contracts outstanding for its European and Canadian operations of US$106.3 million and US$48.2 million, respectively, that were designated as cash flow hedges.
Interest Rate Swap Agreement Designated as Cash Flow Hedge
During the six months ended July 30, 2016, the Company entered into an interest rate swap agreement with a notional amount of $21.5 million, designated as a cash flow hedge, to hedge the variability of cash flows in interest payments associated with the Company’s floating-rate debt. This interest rate swap agreement matures in January 2026 and converts the nature of the Company’s real estate secured term loan from LIBOR floating-rate debt to fixed-rate debt, resulting in a swap fixed rate of approximately 3.06%.
As of July 30, 2016, accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized loss of approximately $0.4 million, net of tax, which will be recognized in interest expense after the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values.

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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 July 30, 2016 and August 1, 2015 (in thousands): 
 
Gain (Loss)
Recognized in
OCI