Share Based Compensation

6 Months Ended

Jul. 30, 2011

Share Based Compensation [Abstract]

SHARE-BASED COMPENSATION

3. SHARE-BASED COMPENSATION

Financial Statement Impact

The Company recognized share-based compensation expense of $13.5 million and $24.4 million for the thirteen and twenty-six week periods ended July 30, 2011, respectively, and $10.4 million and $19.9 million for the thirteen and twenty-six week periods ended July 31, 2010, respectively. The Company also recognized $5.1 million and $9.2 million in tax benefits related to share-based compensation expense for the thirteen and twenty-six week periods ended July 30, 2011, respectively, and $3.8 million and $7.1 million for the thirteen and twenty-six week periods ended July 31, 2010, respectively.

The fair value of share-based compensation awards is recognized as compensation expense on a straight-line basis over the awards’ requisite service period, net of forfeitures. For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. If the tax deduction, which arises upon the vesting of restricted stock units or the exercise of stock options/stock appreciation rights, which is principally measured at the award’s intrinsic value, is greater than the recorded deferred tax asset, the tax benefit associated with any excess deduction is considered a “windfall tax benefit” and is recognized as additional paid-in capital. If the tax deduction is less than the recorded deferred tax asset, the resulting difference, or shortfall, is first charged first to additional paid-in capital, to the extent of the pool of “windfall tax benefits”, with any remainder recognized as tax expense. The amount of the Company’s pool of “windfall tax benefits” was approximately $83.8 million as of July 30, 2011, which is sufficient to fully absorb any shortfall which may develop associated with awards currently outstanding.

The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures and for changes to the estimate of expected award forfeitures. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. The effect of adjustments for forfeitures during the twenty-six weeks ended July 30, 2011 was an expense of $1.5 million. The effect of adjustments for forfeitures during the twenty-six weeks ended July 31, 2010 was income of $3.2 million.

Pursuant to an employment agreement, the Chairman and Chief Executive Officer (“CEO”) is eligible to receive “semi-annual grants,” as defined in the agreement. The semi-annual grants vest in equal annual installments over the four year period following the grant date, with the condition that each award becomes fully vested no later than February 1, 2014, except for the final semi-annual grant, which will become fully vested on the date of the grant.

A&F issues shares of Common Stock from treasury stock upon exercise of stock options and stock appreciation rights and vesting of restricted stock units. As of July 30, 2011, A&F had sufficient treasury stock available to settle stock options, stock appreciation rights and restricted stock units outstanding. Settlement of stock awards in Common Stock also requires that the Company has sufficient shares available in stockholder-approved plans at the applicable time.

In the event, at any reporting date during which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the 2005 Long-Term Incentive Plan (the “2005 LTIP”) and the Amended and Restated 2007 Long-Term Incentive Plan (the “Amended and Restated 2007 LTIP”), or under a successor or replacement plan, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards.

Plans

As of July 30, 2011, A&F had two primary share-based compensation plans: the 2005 LTIP, under which A&F grants stock options, stock appreciation rights and restricted stock units to associates of the Company and non-associate members of the A&F Board of Directors, and the Amended and Restated 2007 LTIP, under which A&F grants stock options, stock appreciation rights and restricted stock units to associates of the Company. A&F also has four other share-based compensation plans under which it granted stock options and restricted stock units to associates of the Company and non-associate members of the A&F Board of Directors in prior years.

The Amended and Restated 2007 LTIP, a stockholder-approved plan, permits A&F to annually grant awards of up to 2.0 million underlying shares of A&F’s Common Stock for each type of award, per eligible participant, plus any unused annual limit from prior years. The 2005 LTIP, a stockholder-approved plan, permits A&F to annually grant awards of up to 250,000 underlying shares of A&F’s Common Stock for each award type to any associate of the Company (other than the CEO) who is subject to Section 16 of the Securities Exchange Act of 1934, as amended, at the time of the grant, plus any unused annual limit from prior years. In addition, any non- associate director of A&F is eligible to receive awards under the 2005 LTIP. Under both plans, stock options, stock appreciation rights and restricted stock units vest primarily over four years for associates. Under the 2005 LTIP, restricted stock units typically vest over one year for non-associate directors of A&F. Awards for Michael S. Jeffries have a vesting period defined as the shorter of four years or the award date through the end of the employment agreement. Under both plans, stock options have a ten-year term and stock appreciation rights have up to a ten-year term, subject to forfeiture under the terms of the plans. The plans provide for accelerated vesting if there is a change of control as defined in the plans.

Fair Value Estimates

The Company estimates the fair value of stock options and stock appreciation rights granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock options and stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock options and stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of A&F’s Common Stock price for the most recent historical period equal to the expected term of the stock option or stock appreciation right, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly stock closing price, adjusted for stock splits and dividends.

In the case of restricted stock units, the Company calculates the fair value of the restricted stock units granted using the market price of the underlying Common Stock on the date of grant adjusted for anticipated dividend payments during the vesting period.

Stock Options

The Company did not grant any stock options during the twenty-six weeks ended July 30, 2011 or July 31, 2010.

Below is a summary of stock option activity for the twenty-six weeks ended July 30, 2011:

				Weighted-				Weighted-Average
	Number of			Average		Aggregate		Remaining
Stock Options	Shares			Exercise Price		Intrinsic Value		Contractual Life
Outstanding at January 29, 2011		2,316,648		$	39.51
Granted		—			—
Exercised		(776,328	)		32.22
Forfeited or cancelled		(19,600	)		42.31
Outstanding at July 30, 2011		1,520,720		$	43.20	$	47,009,327		2.8
Stock options exercisable at July 30, 2011		1,427,670		$	42.20	$	45,328,427		2.5
Stock options expected to become exercisable in the future as of July 30, 2011		88,757		$	58.46	$	1,602,972		6.9

The total intrinsic value of stock options exercised during the twenty-six weeks ended July 30, 2011 was $27.0 million. The total intrinsic value of stock options exercised during the twenty-six weeks ended July 31, 2010 was immaterial.

The grant date fair value of stock options vested during the twenty-six weeks ended July 30, 2011 and July 31, 2010 was $2.3 million and $3.7 million, respectively.

As of July 30, 2011, there was $0.9 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock options. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 0.4 years.

Stock Appreciation Rights

The weighted-average estimated fair value of stock appreciation rights granted during the twenty-six weeks ended July 30, 2011 and July 31, 2010, and the weighted-average assumptions used in calculating such fair value, on the date of grant, were as follows:

	Twenty-Six Weeks Ended
	Chairman and Chief Executive
	Officer						Other Executive Officers						All Other Associates
	July 30, 2011			July 31, 2010			July 30, 2011			July 31, 2010			July 30, 2011			July 31, 2010
Grant date market price	$	54.87		$	44.86		$	54.87		$	44.86		$	54.87		$	44.86
Exercise price	$	54.87		$	44.86		$	54.87		$	44.86		$	54.87		$	44.86
Fair value	$	22.09		$	16.96		$	22.29		$	16.99		$	21.86		$	16.68
Assumptions:
Price volatility		53	%		50	%		53	%		51	%		55	%		52	%
Expected term (Years)		4.6			4.7			4.7			4.5			4.1			4.1
Risk-free interest rate		1.9	%		2.3	%		2.0	%		2.3	%		1.7	%		2.1	%
Dividend yield		1.6	%		2.1	%		1.6	%		2.1	%		1.6	%		2.1	%

Below is a summary of stock appreciation rights activity for the twenty-six weeks ended July 30, 2011:

								Weighted-Average
	Number of			Weighted-Average		Aggregate		Remaining
Stock Appreciation Rights	Shares			Exercise Price		Intrinsic Value		Contractual Life
Outstanding at January 29, 2011		7,136,189		$	34.08
Granted:
Chairman and Chief Executive Officer		1,590,908			54.87
Other Executive Officers		217,000			54.87
All Other Associates		153,500			54.87
Exercised		(278,800	)		33.02
Forfeited or cancelled		(50,750	)		40.56
Outstanding at July 30, 2011		8,768,047		$	38.72	$	301,595,096		5.6
Stock appreciation rights exercisable at July 30, 2011		595,640		$	38.23	$	20,784,081		6.0
Stock appreciation rights expected to become exercisable in the future as of July 30, 2011		8,053,097		$	38.68	$	277,351,867		5.6

The total intrinsic value of stock appreciation rights exercised during the twenty-six weeks ended July 30, 2011 was $10.7 million and was immaterial for the twenty-six weeks ended July 31, 2010.

The grant date fair value of stock appreciation rights vested during the twenty-six weeks ended July 30, 2011 was $20.4 million.

As of July 30, 2011, there was $81.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.3 years.

Restricted Stock Units

Below is a summary of restricted stock unit activity for the twenty-six weeks ended July 30, 2011:

				Weighted-Average
				Grant Date Fair
Restricted Stock Units	Number of Shares			Value
Non-vested at January 29, 2011		1,147,754		$	49.59
Granted		550,000			54.24
Vested		(353,817	)		58.66
Forfeited		(73,233	)		42.59
Non-vested at July 30, 2011		1,270,704		$	49.45

The total fair value of restricted stock units granted during the twenty-six weeks ended July 30, 2011 and July 31, 2010 was $29.8 million and $16.6 million, respectively.

The total grant date fair value of restricted stock units and restricted shares vested during the twenty-six weeks ended July 30, 2011 and July 31, 2010 was $20.8 million and $21.1 million, respectively.

As of July 30, 2011, there was $45.2 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested restricted stock units. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.1 years.