STOCK-BASED COMPENSATION

3 Months Ended

May 05, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK-BASED COMPENSATION

NOTE 4: STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation plans in accordance with FASB ASC 718 “Compensation – Stock Compensation.” Under FASB ASC 718, stock-based compensation expense is based on awards ultimately expected to vest, and therefore has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant based on the Company’s historical forfeiture experience and will be revised in subsequent periods if actual forfeitures differ from those estimates.

FASB ASC 718 also requires the benefits of income tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required prior to FASB ASC 718. A summary of the Company’s stock-based compensation (a component of selling, general and administrative expenses) and related income tax benefit is as follows:

	Thirteen Weeks Ended
(in thousands)	May 05, 2018		April 29, 2017
Continuing Operations
Stock option expense	$	232	$	464
Restricted stock expense		991		540
ESPP expense		—		91
Total stock-based compensation	$	1,223	$	1,095
Income tax benefit on stock-based compensation	$	222	$	240
	Thirteen Weeks Ended
(in thousands)	May 05, 2018		April 29, 2017
Discontinued Operations
Stock option expense	$	43	$	63
Restricted stock expense		13		27
Total stock-based compensation	$	56	$	90
Income tax benefit on stock-based compensation	$	4	$	14

The fair value of each option granted during the thirteen week period ended May 5, 2018 and April 29, 2017 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Thirteen Weeks Ended
Continuing Operations	May 5, 2018			April 29, 2017
Stock Options
Expected volatility		0.0	%		40.3	%
Risk-free interest rate		0.0	%		2.2	%
Expected option life (in years)		0			5.84
Expected dividend yield		0.00	%		1.86	%
Weighted average fair value at grant date	$	—		$	4.06
	Thirteen Weeks Ended
Discontinued Operations	May 5, 2018			April 29, 2017
Stock Options
Expected volatility		0.0	%		43.1	%
Risk-free interest rate		0.0	%		2.2	%
Expected option life (in years)		0			5.84
Expected dividend yield		0.00	%		1.85	%
Weighted average fair value at grant date	$	—		$	4.61
	Thirteen Weeks Ended
	May 5, 2018			April 29, 2017
Employee Stock Purchase Plan
Expected volatility		0.0	%		61.8	%
Risk-free interest rate		0.0	%		1.0	%
Expected option life (in years)		0.00			0.25
Expected dividend yield		0.00	%		0.40	%
Weighted average fair value at grant date	$	—		$	4.19

The following is a summary of the methodology applied to develop each assumption:

Expected Volatility - This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of our stock to calculate expected price volatility because management believes that this is the best indicator of future volatility. The Company calculates weekly market value changes from the date of grant over a past period representative of the expected life of the options to determine volatility. An increase in the expected volatility may increase compensation expense.

Risk-free Interest Rate - This is the yield of a U.S. Treasury zero-coupon bond issue effective at the grant date with a remaining term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Expected Lives - This is the period of time over which the options granted are expected to remain outstanding and is based on historical experience. Options granted have a maximum term of seven to ten years. An increase in the expected life will increase compensation expense.

Dividend Yield – This is based on the historical yield for a period equivalent to the expected life of the option. An increase in the dividend yield will decrease compensation expense.

 Employee Stock Purchase Plan

The 2004 Employee Stock Purchase Plan (“ESPP”) (the “2004 Plan”), which was approved by Fred’s shareholders, permits eligible employees to purchase shares of our common stock through payroll deductions at the lower of 85% of the fair market value of the stock at the time of grant, or 85% of the fair market value at the time of exercise. During the fourth quarter of 2017, management and the Board of Directors suspended purchases through the ESPP effective December 31, 2017. The ESPP suspension resulted in 0 shares issued during the thirteen weeks ended May 5, 2018. There are 1,410,928 shares approved to be issued under the 2004 Plan and as of May 5, 2018, there were 595,681 shares available.

Stock Options

The following table summarizes stock option activity during the thirteen weeks ended May 5, 2018:

Continuing Operations	Options			Weighted- Average Exercise Price		Weighted-Average Contractual Life (years)		Aggregate Intrinsic Value (000s)
Outstanding at February 3, 2018		1,171,825		$	13.12		5.1	$	—
Granted		—			—
Cancelled		(297,074	)		12.62
Exercised		—			—
Outstanding at May 5, 2018		874,751		$	13.28		4.7		—
Exercisable at May 5, 2018		309,674		$	14.73		4.1		—

Discontinued Operations	Options			Weighted- Average Exercise Price		Weighted-Average Contractual Life (years)		Aggregate Intrinsic Value (000s)
Outstanding at February 3, 2018		167,375		$	14.23		5.4	$	—
Granted		—			—
Cancelled		(10,185	)		14.66
Exercised		—			—
Outstanding at May 5, 2018		157,190		$	14.39		5.1		—
Exercisable at May 5, 2018		30,812		$	14.54		4.6		—

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Fred’s closing stock price on the last trading day of the period ended May 5, 2018 and the exercise price of the option multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that date. As of May 5, 2018, total unrecognized stock-based compensation expense net of estimated forfeitures related to non-vested stock options for continuing operations was approximately $1.4 million, which is expected to be recognized over a weighted average period of approximately 3.2 years. As of May 5, 2018, total unrecognized stock-based compensation expense net of estimated forfeitures related to non-vested stock options for discontinued operations was approximately $0.2 million, which is expected to be recognized over a weighted average period of approximately 3.2 years. The total fair value of options vested during the thirteen weeks ended May 5, 2018 for continuing operations was $165.7 thousand. The total fair value of options vested during the thirteen weeks ended May 5, 2018 for discontinued operations was $10.3 thousand.

Restricted Stock

The following table summarizes restricted stock activity during the thirteen weeks ended May 5, 2018:

Continuing Operations	Number of Shares			Weighted- Average Grant Date Fair Value
Non-vested Restricted Stock at February 3, 2018		653,895		$	10.14
Granted		222,836			2.74
Forfeited / Cancelled		(50,757	)		15.28
Vested		(79,012	)		10.04
Non-vested Restricted Stock at May 5, 2018		746,962		$	7.59

Discontinued Operations	Number of Shares		Weighted- Average Grant Date Fair Value
Non-vested Restricted Stock at February 3, 2018		11,194	$	15.35
Granted		—		—
Forfeited / Cancelled		—		—
Vested		—		—
Non-vested Restricted Stock at May 5, 2018		11,194	$	15.35

For continuing operations, the aggregate pre-tax intrinsic value of restricted stock outstanding as of May 5, 2018 is $1.2 million with a weighted average remaining contractual life of 7.1 years. The unrecognized compensation expense net of estimated forfeitures, related to the outstanding stock is approximately $2.4 million, which is expected to be recognized over a weighted average period of approximately 3.0 years. The total fair value of restricted stock awards that vested during the thirteen weeks ended May 5, 2018 was $775.6 thousand.

For discontinued operations, the aggregate pre-tax intrinsic value of restricted stock outstanding as of May 5, 2018 is less than $0.1 million with a weighted average remaining contractual life of 5.2 years. The unrecognized compensation expense net of estimated forfeitures, related to the outstanding stock is approximately $0.1 million, which is expected to be recognized over a weighted average period of approximately 3.3 years. No restricted stock related to discontinued operations vested during the thirteen weeks ended May 5, 2018.