STOCK-BASED COMPENSATION

3 Months Ended

Apr. 30, 2023

Share-Based Payment Arrangement [Abstract]

The Company grants stock-based awards under its Stock Incentive Plan (the “Plan”). Shares issued as a result of stock-based compensation transactions generally have been funded with the issuance of new shares of the Company’s common stock.

The Company may grant the following types of incentive awards under the Plan: (i) non-qualified stock options; (ii) incentive stock options; (iii) stock appreciation rights; (iv) restricted stock; (v) restricted stock units (“RSUs”); (vi) performance shares; (vii) performance share units (“PSUs”); and (viii) other stock-based awards. Each award granted under the Plan is subject to an award agreement that incorporates, as applicable, the exercise price, the term of the award, the periods of restriction, the number of shares to which the award pertains, performance periods and performance measures, and such other terms and conditions as the plan committee determines. Awards granted under the Plan are classified as equity awards, which are recorded in stockholders’ equity in the Company’s Consolidated Balance Sheets. When estimating the grant date fair value of stock-based awards, the Company considers whether an adjustment is required to the closing price or the expected volatility of its common stock on the date of grant when the Company is in possession of material non-public information. No such adjustments were made to the grant date fair value of awards granted during the thirteen weeks ended April 30, 2023.

Through April 30, 2023, the Company has granted under the Plan (i) service-based non-qualified stock options, referred to as “stock options” below, RSUs and restricted stock; and (ii) contingently issuable PSUs and RSUs. There were no shares of restricted stock or contingently issuable RSUs outstanding as of April 30, 2023.

According to the terms of the Plan, for purposes of determining the number of shares available for grant, each share underlying a stock option award reduces the number available by one share and each share underlying an RSU or PSU award reduces the number available by two shares.

Net income for the thirteen weeks ended April 30, 2023 and May 1, 2022 included $13.1 million and $10.1 million, respectively, of pre-tax expense related to stock-based compensation, with related recognized income tax benefits of $1.6 million and $1.4 million, respectively.

The Company receives a tax deduction for certain transactions associated with its stock-based awards. The actual income tax benefits realized from these transactions during the thirteen weeks ended April 30, 2023 and May 1, 2022 were $1.6 million and $1.9 million, respectively. The tax benefits realized included discrete net excess tax deficiencies of $0.1 million and $0.8 million recognized in the Company’s provision for income taxes during the thirteen weeks ended April 30, 2023 and May 1, 2022, respectively.

Stock Options

Stock options granted to employees are generally exercisable in four equal annual installments commencing one year after the date of grant. The underlying stock option award agreements generally provide for accelerated vesting upon the award recipient’s retirement (as defined in the Plan). Such stock options are granted with a 10-year term and the per share exercise price cannot be less than the closing price of the common stock on the date of grant.

The Company estimates the fair value of stock options at the date of grant using the Black-Scholes-Merton model. The estimated fair value of the stock options granted is expensed over the stock options’ requisite service periods.

The following summarizes the assumptions used to estimate the fair value of stock options granted during the thirteen weeks ended April 30, 2023 and May 1, 2022 and the resulting weighted average grant date fair value per stock option:


	4/30/23			5/1/22
Weighted average risk-free interest rate	3.33		%	2.50		%
Weighted average expected stock option term (in years)	6.25			6.25
Weighted average Company volatility	50.60		%	47.34		%
Expected annual dividends per share	$	0.15		$	0.15
Weighted average grant date fair value per stock option	$	43.47		$	34.27

The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected stock option term. The expected stock option term represents the weighted average period of time that stock options granted are expected to be outstanding, based on vesting schedules and the contractual term of the stock options. Company volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the expected stock option term. Expected dividends are based on the anticipated common stock cash dividend rate for the Company at the time of grant.

The Company has continued to utilize the simplified method to estimate the expected term for its “plain vanilla” stock options granted due to a lack of relevant historical data resulting, in part, from changes in the pool of employees receiving stock option grants. The Company will continue to evaluate the appropriateness of utilizing such method.

Stock option activity for the thirteen weeks ended April 30, 2023 was as follows:


(In thousands, except per stock option data)	Stock Options	Weighted Average Exercise Price Per Stock Option
Outstanding at January 29, 2023	694	$	98.08
Granted	86	83.80
Exercised	—	—
Forfeited / Expired	3	104.30
Outstanding at April 30, 2023	777	$	96.47
Exercisable at April 30, 2023	534	$	104.72

RSUs

RSUs granted to employees generally vest in four equal annual installments commencing one year after the date of grant, although the Company does grant from time to time, and currently has outstanding, RSUs with different vesting schedules. Service-based RSUs granted to non-employee directors vest in full the earlier of one year after the date of grant or the date of the Annual Meeting of Stockholders following the year of grant. The underlying RSU award agreements for employees generally provide for accelerated vesting upon the award recipient’s retirement (as defined in the Plan). The fair value of RSUs is equal to the closing price of the Company’s common stock on the date of grant and is expensed over the RSUs’ requisite service periods.

RSU activity for the thirteen weeks ended April 30, 2023 was as follows:


(In thousands, except per RSU data)	RSUs	Weighted Average Grant Date Fair Value Per RSU
Non-vested at January 29, 2023	1,325	$	77.33
Granted	579	83.91
Vested	157	84.66
Forfeited	21	79.15
Non-vested at April 30, 2023	1,726	$	78.85

PSUs

Contingently issuable PSUs granted to employees generally vest three years after the date of grant, subject to the satisfaction of performance conditions. The Company granted contingently issuable PSUs to certain of the Company’s senior executives during the first quarter of 2023 and the second quarters of 2022 and 2021. The final number of shares to be earned, if any, is contingent upon the Company’s achievement of goals for the applicable performance period. For all such awards, 50% is based upon the Company’s total shareholder return (“TSR”) during a three-year performance period from the grant date relative to a pre-established group of industry peers (which is substantially identical for grants in 2021 through 2023). For awards granted in 2023, the other 50% is based upon the Company’s average return on invested capital (“ROIC”) during a three-year performance period beginning with the fiscal year of grant. For awards granted in 2022, the other 50% is based upon the cumulative amount of the Company’s consolidated earnings before interest and taxes (“EBIT”) during a three-year performance period beginning with the fiscal year of grant. For awards granted in 2021, the other 50% was based upon the cumulative amount of the Company’s EBIT for fiscal 2021. The performance period ended in the fourth quarter of 2021 for the awards granted in 2021 and the maximum level of performance was achieved. These shares will vest and be paid out subject to and following the completion of the three-year service period.

For all such awards, the Company records expense ratably over the three-year service period, with expense determined as follows: (i) TSR-based portion of the awards – based on the grant date fair value regardless of whether the market condition is satisfied because the awards are subject to market conditions and (ii) ROIC- or EBIT-based portion of the awards – based on the grant date fair value per share and the Company’s current expectations of the probable number of shares that will ultimately be issued. The grant date fair value of the awards granted was established as follows: (i) TSR-based portion of the awards – using the Monte Carlo simulation model and (ii) ROIC- or EBIT-based portion of the awards – based on the closing price of the

Company’s common stock reduced for the present value of any dividends expected to be paid on such common stock during the three-year service period, as these contingently issuable PSUs do not accrue dividends.

The Company also granted contingently issuable PSUs to certain of the Company’s senior executives during the first, second and third quarters of 2020, subject to a three-year performance period from the applicable grant date. For these awards, the final number of shares to be earned, if any, is contingent upon the Company’s achievement of goals for the applicable performance period, of which (i) 50% is based upon the Company’s absolute stock price growth during the applicable performance period and (ii) 50% is based upon the Company’s TSR during the applicable performance period relative to other companies included in the S&P 500 as of the grant date. For these awards, the Company records expense ratably over the three-year service period based on the grant date fair value of the awards regardless of whether the market condition is satisfied because the awards are subject to market conditions. The grant date fair value of the awards granted was established for each grant using the Monte Carlo simulation model. For awards granted in the first quarter of 2020, the three-year performance period ended during the first quarter of 2023 and the holders of the awards earned an aggregate of 102,000 shares, which was between target and maximum levels.

The following summarizes the assumptions used to estimate the fair value of PSUs subject to market conditions that were granted during the thirteen weeks ended April 30, 2023 and the resulting weighted average grant date fair value:


	4/30/23
Weighted average risk-free interest rate	3.56		%
Weighted average Company volatility	58.21		%
Expected annual dividends per share	$	0.15
Weighted average grant date fair value per PSU	$	120.42

The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for the term corresponding to the three-year performance period. Company volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the three-year performance period. Expected dividends are based on the anticipated common stock cash dividend rate for the Company at the time of grant.

For certain of the awards granted, the after-tax portion of the award is subject to a holding period of one year after the vesting date. For these awards, the grant date fair value was discounted 7.40% in 2023 for the restriction of liquidity, which was calculated using the Finnerty model.

Total PSU activity for the thirteen weeks ended April 30, 2023 was as follows:


(In thousands, except per PSU data)	PSUs	Weighted Average Grant Date Fair Value Per PSU
Non-vested at January 29, 2023	244	$	84.40
Granted	122	100.44
Change due to market conditions achieved above target	35	58.35

Vested	102	58.35
Forfeited	—	—
Non-vested at April 30, 2023	299	$	96.81