21. Share-Based Compensation

Stock Awards

Under the Company’s 2007 Stock Incentive Plan (the “2007 Stock Plan”), stock options, restricted stock, restricted stock units, stock appreciation rights, or other stock-based awards may be granted to officers and other employees of the Company, including its subsidiaries and operating divisions worldwide. Nonemployee directors are also eligible to receive stock options under this plan, although none are outstanding as of January 28, 2017. Options for employees become exercisable in substantially equal annual installments over a three-year period, beginning with the first anniversary of the date of grant of the option, unless a shorter or longer duration is established at the time of the option grant. The options terminate up to ten years from the date of grant. On May 21, 2014, the 2007 Stock Plan was amended to increase the number of shares of the Company’s common stock reserved for all awards to 14 million shares. As of January 28, 2017, there were 11,972,656 shares available for issuance under this plan.

Employees Stock Purchase Plan

Under the Company’s 2013 Foot Locker Employees Stock Purchase Plan (“ESPP”), participating employees are able to contribute up to 10 percent of their annual compensation, not to exceed $25,000 in any plan year, through payroll deductions to acquire shares of the Company’s common stock at 85 percent of the lower market price on one of two specified dates in each plan year. Of the 3,000,000 shares of common stock authorized under this plan, there were 2,633,655 shares available for purchase as of January 28, 2017. During 2016 and 2015, participating employees purchased 80,992 shares and 124,494 shares, respectively.

Share-Based Compensation Expense

Total compensation expense included in SG&A and the associated tax benefits recognized related to the Company’s share-based compensation plans were as follows:



	2016		2015		2014
	($ in millions)
Options and shares purchased under the employee stock purchase plan	$	10	$	11	$	13
Restricted stock and restricted stock units		12		11		11
Total share-based compensation expense	$	22	$	22	$	24

Tax benefit recognized	$	6	$	8	$	7
Excess income tax benefit from settled equity-classified share-based awards reported as a cash flow from financing activities	$	20	$	35	$	12

Valuation Model and Assumptions

The Black-Scholes option-pricing model is used to estimate the fair value of share-based awards. The Black-Scholes option-pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility.

The Company estimates the expected term of share-based awards using the Company’s historical exercise and post-vesting employment termination patterns, which it believes are representative of future behavior. The expected term for the employee stock purchase plan valuation is based on the length of each purchase period as measured at the beginning of the offering period, which is one year.

The Company estimates the expected volatility of its common stock at the grant date using a weighted-average of the Company’s historical volatility and implied volatility from traded options on the Company’s common stock. The Company believes that this combination of historical volatility and implied volatility provides a better estimate of future stock price volatility.

The risk-free interest rate assumption is determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The expected dividend yield is derived from the Company’s historical experience.

The Company records share-based compensation expense only for those awards expected to vest using an estimated forfeiture rate based on its historical pre-vesting forfeiture data. In connection with the adoption of ASU 2016-09 as of the beginning of 2017, we have made the accounting policy election to discontinue estimating forfeitures and will account for forfeitures as they occur using a modified retrospective approach.

The following table shows the Company’s assumptions used to compute the share-based compensation expense:



		Stock Option Plans									Stock Purchase Plan
		2016			2015			2014			2016			2015			2014
Weighted-average risk free rate of interest		1.4	%		1.5	%		2.1	%		0.5	%		0.2	%		0.1	%
Expected volatility		30	%		30	%		39	%		27	%		25	%		24	%
Weighted-average expected award life (in years)		5.7			6.0			6.1			1.0			1.0			1.0
Dividend yield		1.7	%		1.6	%		1.9	%		1.8	%		1.6	%		2.0	%
Weighted-average fair value	$	15.71		$	16.07		$	15.30		$	13.33		$	10.47		$	7.35

The information set forth in the following table covers options granted under the Company’s stock option plans:


		Weighted-		Weighted-
	Number	Average		Average
	of	Remaining		Exercise
	Shares	Contractual Life		Price
	(in thousands)	(in years)		(per share)
Options outstanding at January 30, 2016	3,694			$	32.62
Granted	500				63.60
Exercised	(1,331)				22.12
Expired or cancelled	(57)				58.01
Options outstanding at January 28, 2017	2,806		5.9	$	42.61
Options exercisable at end of year	1,790		4.4	$	32.36
Options vested and expected to vest	2,780		5.9	$	42.42

The total fair value of options vested during 2016, 2015, and 2014 was $9 million, $15 million, and $9 million, respectively.

The Company received $29 million in cash from option exercises during the year ended January 28, 2017. The total intrinsic value of options exercised (the difference between the market price of the Company’s common stock on the exercise date and the price paid by the optionee to exercise the option) is presented below:



	2016		2015		2014
	($ in millions)
Exercised	$	56	$	99	$	22

The tax benefit realized from option exercises was $21 million, $38 million, and $8 million for 2016, 2015, and 2014, respectively.

The aggregate intrinsic value for stock options outstanding, outstanding and exercisable, and vested and expected to vest (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) is presented below:



	2016
	($ in millions)
Outstanding	$	71
Outstanding and exercisable	$	64
Vested and expected to vest	$	71

As of January 28, 2017, there was $6 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of 1.4 years.

The following table summarizes information about stock options outstanding and exercisable at January 28, 2017:



	Options Outstanding				Options Exercisable
		Weighted-
		Average		Weighted-			Weighted-
		Remaining		Average			Average
Range of Exercise	Number	Contractual		Exercise	Number		Exercise
Prices	Outstanding	Life		Price	Exercisable		Price
	(in thousands, except prices per share and contractual life)
$9.85 to $15.10	500	1.8	$	12.22	500	$	12.22
$18.84 to $30.92	426	4.3		25.91	426		25.91
$34.24 to $55.02	701	5.9		40.91	560		39.55
$56.35 to $73.21	1,179	8.2		62.53	304		61.25
	2,806	5.9	$	42.61	1,790	$	32.36

Restricted Stock and Restricted Stock Units

Restricted shares of the Company’s common stock and restricted stock units (“RSU”) may be awarded to certain officers and key employees of the Company. RSU awards are made to employees in connection with the Company’ long-term incentive program, and to nonemployee directors. Each RSU represents the right to receive one share of the Company’s common stock provided that the performance and vesting conditions are satisfied. In 2016, 2015, and 2014, there were 648,558, 588,308, and 755,936 RSU awards outstanding, respectively.

Generally, awards fully vest after the passage of time, typically three years. However, RSU awards made in connection with the Company’s long-term incentive program are earned after the attainment of certain performance metrics and vest after the passage of time. Restricted stock is considered outstanding at the time of grant and the holders have voting rights. Dividends are paid to holders of restricted stock that vest with the passage of time. With regard to performance-based restricted stock, dividends will be accumulated and paid after the performance criteria are met. No dividends are paid or accumulated on RSU awards. Compensation expense is recognized using the fair market value on the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company. Restricted share and RSU activity is summarized as follows:



			Weighted-Average
		Number	Remaining	Weighted-Average
		of	Contractual	Grant Date
		Shares	Life	Fair Value
		(in thousands)	(in years)		(per share)
Nonvested at January 30, 2016		803		$	45.19
Granted		369			63.82
Vested		(249)			38.13
Expired or cancelled		(125)			39.51
Nonvested at January 28, 2017		798	1.1	$	56.91
Aggregate value ($ in millions)	$	45

The total fair value of awards for which restrictions lapsed was $9 million, $10 million, and $14 million for 2016, 2015, and 2014, respectively. At January 28, 2017, there was $12 million of total unrecognized compensation cost net of estimated forfeitures, related to nonvested restricted stock awards.