Stock-Based Compensation

3 Months Ended

May 04, 2013

Stock-Based Compensation

7. Stock-Based Compensation

On March 25, 2013, the Company granted stock options to purchase a total of 554,500 shares of Class A common stock under the Tilly’s 2012 Equity and Incentive Award Plan (the “2012 Plan”). The exercise price of these awards is $12.82, which was the closing price of Tilly’s Class A common stock on the date of grant. These stock options vest in four equal annual installments beginning on the first anniversary of the date of grant, provided that the respective award recipient continues to be employed by the Company through each of those vesting dates.

The total grant date fair value of stock options granted during the thirteen weeks ended May 4, 2013 was $3.4 million, before applying an estimated forfeiture rate. The Company is recognizing the expense relating to these stock options, net of estimated forfeitures, on a straight-line basis over the four year service period of the awards. The Company did not grant any stock options during the thirteen weeks ended April 28, 2012.

The stock option awards discussed above were measured at fair value on the grant date using the Black-Scholes option valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term and the Company’s expected annual dividend yield, if any. The Company’s estimate of pre-vesting forfeitures, or forfeiture rate, was based on its internal analysis, which included the award recipients’ positions within the Company and the vesting period of the awards. The Company will issue shares of Class A common stock when the options are exercised.

The fair value of stock options granted during the thirteen weeks ended May 4, 2013 was estimated on the grant date using the following assumptions:

Expected option term(1)	5.0 years
Expected volatility factor(2)	56.2	%
Risk-free interest rate(3)	0.8	%
Expected annual dividend yield	0	%

(1) The Company has limited historical information regarding expected option term. Accordingly, the Company determined the expected option term of the awards using historical data available from comparable public companies and management’s expectation of exercise behavior.

(2) Stock volatility for each grant is measured using the weighted average of historical daily price changes of the Company’s competitors’ common stock over the most recent period equal to the expected option term of the Company’s awards.

(3) The risk-free interest rate is determined using the rate on treasury securities with the same term as the expected life of the stock option as of the grant date.

The following table summarizes the Company’s stock option activity for the thirteen weeks ended May 4, 2013 (aggregate intrinsic value in thousands):

						Weighted
				Grant Date		Average
				Weighted		Remaining		Aggregate
	Stock			Average		Contractual		Intrinsic
	Options			Exercise Price		Life (in Years)		Value(1)
Outstanding at February 2, 2013		2,133,625		$	12.83
Granted		554,500		$	12.82
Exercised		—		$	—
Forfeited		(2,500	)	$	15.50
Outstanding at May 4, 2013		2,685,625		$	12.82		7.7	$	7,521
Vested at May 4, 2013		1,276,500		$	10.94		6.1	$	5,930
Expected to vest after May 4, 2013		1,214,616		$	14.52		9.1	$	1,378

(1) Intrinsic value for stock options is defined as the difference between the market price of the Company’s Class A common stock on the last business day of the fiscal quarter and the weighted average exercise price of in-the-money stock options outstanding at the end of each fiscal period. The market value per share was $15.39 at May 3, 2013.

There are a total of 2,913,900 shares issuable under the 2012 Plan, of which 1,615,434 shares were still available for issuance as of May 4, 2013. The Company recorded a total of $0.9 million of stock-based compensation expense in the thirteen weeks ended May 4, 2013. At May 4, 2013, there was $8.1 million of total unrecognized stock-based compensation expense related to unvested stock options and restricted stock grants. This cost has a weighted average remaining recognition period of 3.1 years.