9. Share-based payments

The Company accounts for share-based payments in accordance with applicable accounting standards, under which the fair value of each award is separately estimated and amortized into compensation expense over the service period. The fair value of the Company’s stock option grants are estimated on the grant date using the Black-Scholes-Merton valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The fair value of the Company’s other share-based awards discussed below are estimated using the Company’s closing stock price on the grant date. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period.

On July 6, 2007, the Company’s Board of Directors adopted the 2007 Stock Incentive Plan, which plan was subsequently amended and restated on several occasions (as so amended and restated, the “Plan”). The Plan allows the granting of stock options, stock appreciation rights, and other stock-based awards or dividend equivalent rights to key employees, directors, consultants or other persons having a service relationship with the Company, its subsidiaries and certain of its affiliates. The number of shares of Company common stock authorized for grant under the Plan is 31,142,858.

Since May 2011, most of the share-based awards issued by the Company have been in the form of stock options, restricted stock, restricted stock units and performance share units. With limited exceptions, stock options and restricted stock units granted to employees generally vest ratably on an annual basis over four-year and three-year periods, respectively. Awards granted to board members generally vest over a one-year period. The number of performance share units earned are based on performance criteria measured in the year of grant or over a period of two or three years, and such awards generally vest over a three-year period. With limited exceptions, the performance share unit and restricted stock unit awards are payable in shares of common stock on the vesting date. At February 2, 2018, the Company also had a limited number of outstanding stock options issued prior to June 2011 (“Old Options”).

The weighted average for key assumptions used in determining the fair value of all stock options granted in the years ended February 2, 2018, February 3, 2017, and January 29, 2016, and a summary of the methodology applied to develop each assumption, are as follows:


	February 2,		February 3,		January 29,
	2018		2017		2016
Expected dividend yield	1.3	%	1.3	%	1.2	%
Expected stock price volatility	25.5	%	25.4	%	25.3	%
Weighted average risk-free interest rate	2.1	%	1.6	%	1.8	%
Expected term of options (years)	6.3		6.3		6.4

Expected dividend yield - This is an estimate of the expected dividend yield on the Company’s stock. An increase in the dividend yield will decrease compensation expense.

Expected stock price volatility - This is a measure of the amount by which the price of the Company’s common stock has fluctuated or is expected to fluctuate. An increase in the expected volatility will increase compensation expense.

Weighted average risk-free interest rate - This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Expected term of options - This is the period of time over which the options granted are expected to remain outstanding. The Company has estimated the expected term as the mid-point between the vesting date and the contractual term of the option. An increase in the expected term will increase compensation expense.

A summary of the Company’s stock option activity, excluding Old Options, during the year ended February 2, 2018 is as follows:


		Average		Remaining
	Options	Exercise		Contractual	Intrinsic
(Intrinsic value amounts reflected in thousands)	Issued	Price		Term in Years	Value
Balance, February 3, 2017	2,698,658		70.64
Granted	1,031,608		71.70
Exercised	(303,530)		62.38
Canceled	(349,823)		75.13
Balance, February 2, 2018	3,076,913	$	71.31	7.6	$	86,568
Exercisable at February 2, 2018	916,545	$	61.09	6.1	$	35,146

The weighted average grant date fair value per share of options granted was $17.66, $20.06, and $18.48 during 2017, 2016 and 2015, respectively. The intrinsic value of options exercised during 2017, 2016, and 2015, excluding Old Options, was $7.3 million, $17.3 million and $20.8 million, respectively.

The number of performance share unit awards earned is based upon the Company’s financial performance as specified in the award agreement. A summary of performance share unit award activity during the year ended February 2, 2018 is as follows:


	Units	Intrinsic
(Intrinsic value amounts reflected in thousands)	Issued	Value
Balance, February 3, 2017	174,383
Granted	145,141
Converted to common stock	(80,464)
Canceled	(29,970)
Balance, February 2, 2018	209,090	$	20,792

The balance of performance share unit awards at February 2, 2018 includes 34,864 unvested awards, the number of which was computed based upon the performance targets specified in the awards. The number of such awards which will ultimately vest will be based in part on the Company’s financial performance in 2018 and 2019. The weighted average grant date fair value per share of performance share units granted was $70.68, $84.67 and $74.72 during 2017, 2016, and 2015, respectively.

A summary of restricted stock unit award activity during the year ended February 2, 2018 is as follows:


	Units	Intrinsic
(Intrinsic value amounts reflected in thousands)	Issued	Value
Balance, February 3, 2017	501,961
Granted	327,167
Converted to common stock	(261,108)
Canceled	(76,052)
Balance, February 2, 2018	491,968	$	48,921

The weighted average grant date fair value per share of restricted stock units granted was $70.90, $84.56, and $74.67 during 2017, 2016 and 2015, respectively.

At February 2, 2018, 51,308 Old Options were outstanding, all of which were exercisable, with an average exercise price of $22.31, an average remaining contractual term of 2.1 years, and an aggregate intrinsic value of $4.0 million. The intrinsic value of Old Options exercised during 2017, 2016, and 2015 was $6.9 million, $10.8 million and $11.5 million, respectively.

At February 2, 2018, the total unrecognized compensation cost related to unvested stock-based awards was $60.6 million with an expected weighted average expense recognition period of 2.2 years.

The fair value method of accounting for share-based awards resulted in share-based compensation expense (a component of SG&A expenses) and a corresponding reduction in income before and net of income taxes as follows:


	Stock		Performance		Restricted
(In thousands)	Options		Share Units		Stock Units		Total
Year ended February 2, 2018
Pre-tax	$	11,599	$	6,159	$	16,565	$	34,323
Net of tax	$	7,223	$	3,835	$	10,315	$	21,373
Year ended February 3, 2017
Pre-tax	$	12,008	$	7,258	$	17,701	$	36,967
Net of tax	$	7,325	$	4,427	$	10,798	$	22,550
Year ended January 29, 2016
Pre-tax	$	11,113	$	4,856	$	22,578	$	38,547
Net of tax	$	6,779	$	2,962	$	13,772	$	23,513