NOTE 3. STOCK-BASED COMPENSATION

At February 3, 2018, we had four stock-based compensation plans:

(a)

The 2015 Equity Incentive Plan (EIP) provides that the Board of Directors (Board) may grant equity awards to certain employees of the Company at its discretion. The EIP was adopted effective July 1, 2015 and authorizes grants of equity awards of up to 1,000,000 authorized but unissued shares of common stock. At February 3, 2018, there were 711,073 shares available for grant under the EIP.

(b)

The 2015 Employee Stock Purchase Plan (ESPP) allows for qualified employees to participate in the purchase of up to 300,000 shares of our common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period. The ESPP was adopted effective July 1, 2015. At February 3, 2018, there were 254,795 shares available for purchase under the ESPP.

(c)

The 2015 Director Deferred Compensation Plan (Deferred Plan) allows non-employee directors an election to defer all or a portion of their fees into stock units or stock options. The Deferred Plan was adopted effective July 1, 2015 and authorizes grants up to 150,000 authorized but unissued shares of common stock. At February 3, 2018, there were 135,353 shares available for grant under the Deferred Plan.

(d)

The 2012 Non-Employee Director Equity Plan (DEP) provides for grants of equity awards to non-employee directors. The DEP was adopted effective May 24, 2012 and authorizes grants of equity awards of up to 500,000 authorized but unissued shares of common stock. At February 3, 2018, there were 306,701 shares available for grant under the DEP.

Our plans allow for a variety of equity awards including stock options, restricted stock awards, stock appreciation rights and performance awards. As of February 3, 2018, we had only granted awards in the form of stock options, restricted stock units (RSUs) and performance-based units (PSUs) to our employees. The annual grants made for Fiscal 2018, Fiscal 2017 and Fiscal 2016 to employees consisted solely of RSUs. We have also awarded PSUs to our Named Executive Officers (NEOs) and expect the Compensation Committee of the Board will continue to grant PSUs to our NEOs in the future.

As of February 3, 2018, we had only granted awards in the form of stock, stock options and deferred stock units (DSUs) to our Board members. Under the DEP, Board members currently receive an annual value of $75,000 worth of equity in the form of stock options or RSUs upon election to the Board and a value of $100,000 worth of equity in any form allowed within the DEP, for each full year of service, pro-rated for Directors who serve less than one full year. The Chairman of the Board receives an annual value of $150,000 of equity in any form allowed within the DEP.

The terms and vesting schedules for stock-based awards vary by type of grant and generally vest upon time-based conditions. Under the DEP, Directors have the option with certain equity forms to set vesting dates. Upon exercise, stock-based compensation awards are settled with authorized but unissued company stock. All of our awards are classified as equity awards.

The compensation cost for these plans was as follows (in thousands):

	Fiscal Year Ended
	February 3, 2018			January 28, 2017			January 30, 2016
	(53 weeks)			(52 weeks)			(52 weeks)
Stock-based compensation expense by type:
Stock options		$	224		$	384		$	391
Restricted stock units			3,536			4,010			4,632
Employee stock purchases			96			104			105
Director deferred compensation			24			94			70
Total stock-based compensation expense			3,880			4,592			5,198
Income tax benefit recognized			1,363			1,655			1,895
Stock-based compensation expense, net of income tax		$	2,517		$	2,937		$	3,303

Stock-based and deferred stock compensation expenses are included in store operating, selling and administrative expenses. There is no capitalized stock-based compensation cost.

The income tax benefit recognized in our consolidated financial statements, as disclosed above, is based on the amount of compensation expense recorded for book purposes. The actual income tax benefit realized in our income tax return is based on the intrinsic value, or the excess of the market value over the exercise or purchase price, of stock options exercised and restricted stock unit awards vested during the period. The actual income tax benefit realized for the deductions considered on our income tax returns for Fiscal 2018, Fiscal 2017 and Fiscal 2016 was from option exercises and restricted stock unit releases and totaled $0.9 million, $1.2 million and $2.5 million, respectively.

Stock Options

Stock options are granted with an exercise price equal to the closing market price of our common stock on the date of grant. Vesting and expiration provisions vary between equity plans, but options granted to employees under the EIP typically vest over a four or five-year period in equal installments beginning on the first anniversary of the grant date and typically expire on the eighth or tenth anniversary of the date of grant. Grants awarded to outside directors under the DEP and Deferred Plan vest immediately upon grant and expire on the tenth anniversary of the date of grant.

Following is the weighted average fair value of each option granted during Fiscal 2018. The fair value was estimated on the date of grant using the Black-Scholes pricing model with the following weighted average assumptions for each period:

	Quarter Ended
	April 29, 2017		October 28, 2017				February 3, 2018
Grant date	Mar 14		Sep 16		Sep 30		Dec 31
Exercise price		$29.75		$13.85		$14.25		$20.40
Weighted average fair value at date of grant		$8.47		$4.20		$4.09		$6.37
Expected option life (years)		4.46		4.46		3.98		3.98
Expected volatility		30.24%		33.27%		33.38%		36.18%
Risk-free interest rate		1.99%		1.73%		1.76%		2.08%
Dividend yield	None		None		None		None

We calculate the expected term for our stock options based on the historical exercise behavior of our participants. Historically, an increase in our stock price has led to a pattern of earlier exercise by participants. Grants made to our Directors have a contractual term of 10 years, while grants made to our employees have a contractual term of 8 years. We have not awarded a stock option grant to employees since 2009. With the absence of option grants to employees, we anticipate the expected term will remain relatively stable.

The volatility used to value stock options is based on historical volatility. We calculate historical volatility using an average calculation methodology based on daily price intervals as measured over the expected term of the option. We have consistently applied this methodology since our adoption of the provisions of ASC Topic 718, Stock Compensation.

In accordance with ASC Topic 718, we base the risk-free interest rate on the annual continuously compounded risk-free rate with a term equal to the option's expected term. The dividend yield is assumed to be zero since we have no current plan to declare dividends.

Activity for our option plans during Fiscal 2018 was as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value ($000's)
Options outstanding at January 28, 2017		263,604		$	37.47		5.11	$	963
Granted		41,549			22.08
Exercised		(13,763	)		20.44
Forfeited, cancelled or expired		(3,240	)		26.89
Options outstanding at February 3, 2018		288,150		$	36.15		5.12	$	324

Exercisable at February 3, 2018		269,573		$	37.72		4.81	$	161

The weighted average grant-date fair value of options granted during Fiscal 2018, Fiscal 2017 and Fiscal 2016 was $6.42, $10.56 and $16.63, respectively. The compensation expense included in store operating, selling and administrative expenses and recognized during Fiscal 2018, Fiscal 2017 and Fiscal 2016 was $0.2 million, $0.4 million and $0.4 million, respectively, before the recognized income tax benefit of $0.1 million each year.

The total intrinsic value of stock options exercised during Fiscal 2018, Fiscal 2017 and Fiscal 2016 was $0.1 million, $0.6 million and $0.2 million, respectively. The total cash received from these stock option exercises during Fiscal 2018, Fiscal 2017 and Fiscal 2016 was $0.3 million, $0.4 million and $0.4 million, respectively. For Fiscal 2018, with the adoption of ASU 2016-09, excess income tax proceeds from stock option exercises are no longer applicable. For Fiscal 2017 and Fiscal 2016, excess income tax proceeds from stock option exercises are included in cash flows from financing activities as required by ASC Topic 230, Statement of Cash Flows. As of February 3, 2018, there was approximately $42,000 of total unamortized unrecognized compensation cost related to stock options. This cost is expected to be recognized over a weighted average period of 0.6 years.

Restricted Stock and Performance-Based Units

RSUs and PSUs are granted with a fair value equal to the closing market price of our common stock on the date of grant. All PSUs have been awarded in the form of restricted stock units. Compensation expense is recorded straight-line over the vesting period and, in the case of PSUs, at the estimated percentage of achievement. Restricted stock unit awards to our employees generally cliff vest in four years from the date of grant for those awards that are not performance-based. If a Director chooses to receive their annual equity award in stock and he or she defers the vesting date, then the form of stock is a DSU. PSUs provide for awards based on achievement of certain predetermined corporate performance goals and cliff vest in three to five years from the date of grant after achievement of stated performance criterion and upon meeting stated service conditions.

The following table summarizes the restricted stock unit awards activity under all of our plans during Fiscal 2018:

	RSUs					PSUs					Totals
	Number of Awards			Weighted Average Grant-Date Fair Value		Number of Awards			Weighted Average Grant-Date Fair Value		Number of Awards			Weighted Average Grant-Date Fair Value
Restricted stock unit awards outstanding at January 28, 2017		299,368		$	46.68		95,475		$	44.71		394,843		$	46.20
Granted		111,790			29.75		54,900			29.30		166,690			29.60
PSU adjustment (1)		-			-		(9,380	)		45.30		(9,380	)		45.30
Vested		(72,449	)		50.91		(8,625	)		54.73		(81,074	)		51.31
Forfeited, cancelled or expired		(25,098	)		41.27		-			-		(25,098	)		41.27
Restricted stock unit awards outstanding at February 3, 2018		313,611		$	40.10		132,370		$	37.55		445,981		$	39.34

(1) PSU adjustment represents the net RSUs awarded to our NEOs above and below their target grants resulting from the achievement of performance goals above or below the performance targets established at grant. One goal was achieved at 50% and another goal was achieved at 80% for all performance equity awards released in Fiscal 2018; therefore, the adjustment was negative.

The weighted average grant date fair value of our RSUs granted was $29.60, $35.12 and $50.48 for Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively. There were 166,690, 163,643 and 111,705 RSUs awarded during Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively. The compensation expense included in store operating, selling and administrative expenses and recognized during Fiscal 2018, Fiscal 2017 and Fiscal 2016 was $3.5 million, $4.0 million and $4.6 million, respectively, before the recognized income tax benefit of $1.3 million, $1.5 million and $1.7 million, respectively.

During Fiscal 2018, RSU awards of 81,074 unit awards, including 8,625 awards that were PSUs, vested with an intrinsic value of $2.4 million. The total intrinsic value of our RSU awards outstanding and unvested at February 3, 2018, January 28, 2017 and January 30, 2016 was $9.9 million, $12.9 million and $10.9 million, respectively. As of February 3, 2018, there was approximately $5.2 million of total unamortized unrecognized compensation cost related to RSU awards. This cost is expected to be recognized over a weighted average period of 2.3 years.

Employee Stock Purchase Plan

The Company's ESPP allows eligible employees the right to purchase shares of our common stock, subject to certain limitations, at 85% of the lesser of the market value at the end of each calendar quarter (purchase date) or the beginning of each calendar quarter. Our employee purchases of common stock and the average price per share through the ESPP were as follows:

Fiscal Year Ended	Shares Purchased		Average Price Per Share
February 3, 2018		23,555	$	16.36
January 28, 2017		14,890	$	28.48
January 30, 2016		12,251	$	33.40

The assumptions used in the option pricing model were as follows:

	Fiscal Year Ended
	February 3, 2018		January 28, 2017		January 30, 2016
Weighted average fair value at date of grant		$4.06		$6.98		$9.48
Expected life (years)		0.25		0.25		0.25
Expected volatility		30.2% - 36.2%		30.1% - 32.0%		32.0% - 36.2%
Risk-free interest rate		1.19% - 2.48%		0.37% - 0.68%		0.02% - 0.09%
Dividend yield	None		None		None

The expense related to the ESPP was determined using the Black-Scholes option pricing model and the provisions of ASC Topic 718 as it relates to accounting for certain employee stock purchase plans with a look-back option. The compensation expense included in store operating, selling and administrative expenses and recognized during each of Fiscal 2018, Fiscal 2017 and Fiscal 2016 was $0.1 million.

Director Deferred Compensation

Under the Deferred Plan, non-employee directors can elect to defer all or a portion of their Board and Board Committee fees into cash, stock options or deferred stock units. Those fees deferred into stock options are subject to the same provisions as provided for in the DEP and are expensed and accounted for accordingly. Director fees deferred into stock units are calculated and expensed each calendar quarter by taking total fees earned during the calendar quarter and dividing by the closing price of our common stock on the last day of the calendar quarter, rounded to the nearest whole share. The total annual retainer, Board and Board Committee fees for non-employee directors that are not deferred into stock options, but which includes amounts deferred into stock units under the Deferred Plan, are expensed as incurred in all periods presented. A total of 1,195, 2,542 and 1,812 stock units were deferred under this plan in Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively. One director has elected to defer compensation into stock units in calendar 2018.

The compensation expense included in store operating, selling and administrative expenses and recognized during Fiscal 2018, Fiscal 2017 and Fiscal 2016 was $24,000, $94,000 and $70,000, respectively, before the recognized income tax benefit of $9,000, $35,000 and $26,000, respectively.