SHARE-BASED COMPENSATION

Financial Statement Impact

The Company recognized share-based compensation expense of $23.0 million, $53.5 million and $52.9 million for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively. The Company also recognized $8.6 million, $20.3 million and $20.1 million in tax benefits related to share-based compensation for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively.

The fair value of share-based compensation awards is recognized as compensation expense primarily on a straight-line basis over the awards’ requisite service period, net of estimated forfeitures, with the exception of performance share awards. Performance share award expense is primarily recognized in the performance period of the awards' requisite service period. 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. A current tax deduction arises upon the vesting of restricted stock units and performance share awards or the exercise of stock options and stock appreciation rights and is principally measured at the award’s intrinsic value. If the tax deduction is greater than the recorded deferred tax asset, the tax benefit associated with any excess deduction is considered an excess 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 to additional paid-in capital, to the extent of the windfall pool of excess tax benefits, with any remainder recognized as tax expense. The Company’s windfall pool of excess tax benefits as of January 31, 2015, 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 was $2.6 million, $2.3 million and $1.3 million for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively.

The Company issues shares of Common Stock from treasury stock upon exercise of stock options and stock appreciation rights and vesting of restricted stock units, including those converted from performance share awards. As of January 31, 2015, the Company had sufficient treasury stock available to settle stock options, stock appreciation rights, restricted stock units and performance share awards 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 each reporting date during which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the Amended and Restated Abercrombie & Fitch Co. 2007 Long-Term Incentive Plan (the “2007 LTIP”) and the Abercrombie & Fitch Co. 2005 Long-Term Incentive Plan (the “2005 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. The fair value of liability-classified awards is re-measured each reporting date until such awards no longer remain outstanding or until sufficient shares of Common Stock become available to be issued under the existing plans or under a successor or replacement plan. As long as the awards are required to be classified as a liability, the change in fair value would be recognized in current period expense based on the requisite service period rendered.

Plans

As of January 31, 2015, the Company had two primary share-based compensation plans: the 2005 LTIP, under which the Company grants stock appreciation rights, restricted stock units and performance share awards to associates of the Company and non-associate members of the Company's Board of Directors, and the 2007 LTIP, under which the Company grants stock appreciation rights, restricted stock units and performance share awards to associates of the Company. The Company 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 the Company's Board of Directors in prior years.

The 2007 LTIP, a stockholder-approved plan, permits the Company to annually grant awards covering up to 2.0 million of underlying shares of the Company'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 the Company to annually grant awards covering up to 250,000 of underlying shares of the Company's Common Stock for each award type to any associate of the Company (other than the Chief Executive Officer (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 the Company is eligible to receive awards under the 2005 LTIP. Under both plans, stock appreciation rights and restricted stock units vest primarily over four years for associates, while performance share awards are primarily earned and vest over the performance period. Under the 2005 LTIP, restricted stock units typically vest after approximately one year for non-associate directors of the Company. 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.

Stock Options

The Company did not grant any stock options during Fiscal 2014, Fiscal 2013 and Fiscal 2012. Below is a summary of stock option activity for Fiscal 2014:



	Number of Underlying Shares		Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life
Outstanding at February 1, 2014	532,400		$	65.37
Granted	—		—
Exercised	(7,500	)	33.74
Forfeited or expired	(196,800	)	67.79
Outstanding at January 31, 2015	328,100		$	64.64	$	310,100	2.6
Stock options exercisable at January 31, 2015	328,100		$	64.64	$	310,100	2.6

The total intrinsic value of stock options exercised was insignificant during Fiscal 2014 and Fiscal 2013, and was $2.0 million during Fiscal 2012.

The grant date fair value of stock options that vested was insignificant during Fiscal 2014 and Fiscal 2013, and was $1.3 million during Fiscal 2012.

As of January 31, 2015, all compensation cost related to currently outstanding stock options had been fully recognized.

Stock Appreciation Rights

The following table summarizes stock appreciation rights activity for Fiscal 2014:



	Number of Underlying Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life
Outstanding at February 1, 2014	8,982,959		$	40.76
Granted	512,216		36.31
Exercised	(92,475	)	26.92
Forfeited or expired	(449,025	)	48.03
Outstanding at January 31, 2015	8,953,675		$	40.28	$	5,099,000	2.6
Stock appreciation rights exercisable at January 31, 2015	8,152,634		$	40.17	$	5,099,000	2.0
Stock appreciation rights expected to become exercisable in the future as of January 31, 2015	739,920		$	41.69	$	—	8.6

The Company estimates the fair value of stock appreciation rights using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the 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 appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of the Company's Common Stock price for the most recent historical period equal to the expected term of the 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. The weighted-average assumptions used in the Black-Scholes option-pricing model for stock appreciation rights granted during Fiscal 2014, Fiscal 2013 and Fiscal 2012 were as follows:



	Executive Officers									All Other Associates
	2014			2013			2012			2014			2013			2012
Grant date market price	$	35.08		$	46.57		$	52.89		$	37.05		$	43.86		$	51.31
Exercise price	$	35.49		$	46.57		$	52.89		$	37.22		$	43.86		$	51.31
Fair value	$	12.85		$	20.34		$	23.53		$	12.92		$	16.17		$	21.90
Assumptions:
Price volatility	49		%	61		%	56		%	50		%	53		%	61		%
Expected term (years)	4.9			4.7			5.0			4.1			4.1			4.1
Risk-free interest rate	1.6		%	0.7		%	1.3		%	1.4		%	0.7		%	0.9		%
Dividend yield	2.0		%	1.8		%	1.1		%	1.9		%	1.8		%	1.2		%

Compensation expense for stock appreciation rights is recognized on a straight-line basis over the awards' requisite service period, net of forfeitures. As of January 31, 2015, there was $8.0 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 16 months.

The total intrinsic value of stock appreciation rights exercised during Fiscal 2014, Fiscal 2013 and Fiscal 2012 was $1.5 million, $8.5 million and $0.9 million, respectively. The grant date fair value of stock appreciation rights that vested during Fiscal 2014, Fiscal 2013 and Fiscal 2012 was $7.4 million, $83.7 million and $24.1 million, respectively.

Restricted Stock Units

The following table summarizes the activity for restricted stock units for Fiscal 2014:



	Service-based Restricted Stock Units				Performance-based Restricted Stock Units				Market-based Restricted Stock Units
	Number of Underlying Shares		Weighted-Average Grant Date Fair Value		Number of Underlying Shares		Weighted-Average Grant Date Fair Value		Number of Underlying Shares		Weighted-Average Grant Date Fair Value
Unvested at February 1, 2014	1,162,825		$	47.15	263,754		$	40.93	—		$	—
Granted	1,019,363		32.45		177,006		26.61		88,500		42.44
Adjustments for performance achievement relative to award target	—		—		(98,483	)	44.51		—		—
Vested	(355,796	)	48.00		(10,002	)	51.50		—		—
Forfeited	(260,120	)	44.59		(126,855	)	31.71		(52,126	)	44.05
Unvested at January 31, 2015	1,566,272		$	37.81	205,420		$	32.05	36,374		$	40.13

The fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying Common Stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining the fair value, the Company does not take into account any performance-based vesting requirements. The performance-based vesting requirements are taken into account in determining the number of awards expected to vest and the related expense. However, for market-based restricted stock units, the fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company's total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For any award with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from 0% - 200% of target depending on the level of achievement of performance criteria.

Service-based restricted stock units are expensed on a straight-line basis over the total requisite service period, net of forfeitures. Performance-based restricted stock units are expensed on an accelerated attribution basis, net of forfeitures. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the requisite service period, net of forfeitures.

As of January 31, 2015, there was $33.6 million, $0.8 million, and $1.0 million of total unrecognized compensation cost, net of estimated forfeitures, related to service-based, performance-based and market-based restricted stock units, respectively. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 16 months, 7 months, and 14 months for service-based, performance-based and market-based restricted stock units, respectively.

Additional information pertaining to restricted stock units for Fiscal 2014, Fiscal 2013 and Fiscal 2012 follows:



(in thousands)	Fiscal 2014		Fiscal 2013		Fiscal 2012
Service-based Restricted Stock Units:
Total grant date fair value of awards granted	$	33,075	$	23,192	$	29,297
Total grant date fair value of awards vested	17,078		14,535		19,532

Performance-based Restricted Stock Units:
Total grant date fair value of awards granted	$	4,709	$	10,814	$	773
Total grant date fair value of awards vested	515		515		—

Market-based Restricted Stock Units:
Total grant date fair value of awards granted	$	3,756	$	—	$	—
Total grant date fair value of awards vested	—		—		—

The weighted-average assumptions for market-based restricted stock units used in the Monte Carlo simulations during Fiscal 2014 were as follows:



	Fiscal 2014
Grant date market price	$	36.20
Fair value	$	40.42
Assumptions:
Price volatility	49		%
Expected term (years)	2.7
Risk-free interest rate	0.8		%
Dividend yield	2.2		%
Average volatility of peer companies	36.0		%
Average correlation coefficient of peer companies	0.3704