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 awards under this plan. 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. Options for nonemployee directors become exercisable one year from the date of 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.

Employees Stock Purchase Plan

In 2013, the Company adopted the 2013 Foot Locker Employees Stock Purchase Plan (“2013 ESPP”), whose terms are substantially the same as the 2003 Employees Stock Purchase Plan (“2003 ESPP”). No further shares may be issued under the 2003 ESPP. Under the 2013 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. Under the 2013 ESPP, 3,000,000 shares of common stock were available for purchase beginning June 2014, of which 958 participating employees purchased 160,859 shares in 2014.

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:


	2014		2013		2012
	(in millions)
Options and shares purchased under the employee stock purchase plan	$	13	$	12	$	10
Restricted stock and units		11		13		10
Total share-based compensation expense	$	24	$	25	$	20
Tax benefit	$	7	$	8	$	6
Tax deductions in excess of the cumulative compensation cost	$	12	$	9	$	11

Valuation Model and Assumptions

The Company uses a Black-Scholes option-pricing model 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 granted 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 the 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. The Company estimates pre-vesting option forfeitures at the time of grant and periodically revises those estimates in subsequent periods if actual forfeitures differ from those estimates.

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


	Stock Option Plans									Stock Purchase Plan
	2014			2013			2012			2014			2013			2012
Weighted-average risk free rate of interest		2.07	%		1.02	%		1.49	%		0.14	%		0.17	%		0.22	%
Expected volatility		39	%		42	%		43	%		24	%		40	%		38	%
Weighted-average expected award life (in years)		6.1			6.0			5.5			1.0			1.0			1.0
Dividend yield		1.9	%		2.3	%		2.3	%		2.0	%		2.3	%		2.5	%
Weighted-average fair value	$	15.30		$	10.98		$	10.13		$	7.35		$	5.79		$	6.11

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


	2014					2013					2012
	Number of Shares			Weighted- Average Exercise Price		Number of Shares			Weighted- Average Exercise Price		Number of Shares			Weighted- Average Exercise Price
	(in thousands, except prices per share)
Options outstanding at beginning of year		5,668		$	22.66		5,907		$	19.93		7,227		$	18.44
Granted		849		$	46.20		1,154		$	34.25		940		$	30.96
Exercised		(810	)	$	21.74		(1,328	)	$	20.26		(2,213	)	$	19.67
Expired or cancelled		(138	)	$	42.55		(65	)	$	29.55		(47	)	$	23.74
Options outstanding at end of year		5,569		$	25.89		5,668		$	22.66		5,907		$	19.93
Options exercisable at end of year		3,759		$	19.74		3,495		$	18.02		3,593		$	17.83
Options vested and expected to vest		5,546		$	25.82		5,558		$	22.45		5,804		$	19.82
Options available for future grant at end of year		13,911					3,267					5,518

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:


	2014		2013		2012
	(in millions)
Exercised	$	22	$	21	$	29

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:


	2014		2013		2012
	(in millions)
Outstanding	$	152	$	90	$	86
Outstanding and exercisable	$	126	$	72	$	60
Vested and expected to vest	$	152	$	90	$	86

As of January 31, 2015, there was $7 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 1.35 years.

The Company received $17 million in cash from option exercises for the year ended January 31, 2015. The tax benefit realized from option exercises was $8 million, $7 million, and $11 million for 2014, 2013, and 2012, respectively.

The following table summarizes information about stock options outstanding and exercisable at January 31, 2015:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price		Number Exercisable		Weighted- Average Exercise Price
	(in thousands, except prices per share and contractual life)
$9.85 to $15.10		1,466		4.63	$	12.39		1,466	$	12.39
$18.80 to $24.76		1,453		5.03	$	20.10		1,453	$	20.10
$25.19 to $34.27		1,896		7.45	$	32.70		828	$	31.82
$34.42 to $56.35		754		9.15	$	46.15		12	$	40.51
		5,569		6.31	$	25.89		3,759	$	19.74

Restricted Stock and Units

Restricted shares of the Company’s common stock and restricted stock units may be awarded to certain officers and key employees of the Company. Awards made to executives outside of the United States and to nonemployee directors are made in the form of restricted stock units. Each restricted stock unit represents the right to receive one share of the Company’s common stock provided that the vesting conditions are satisfied. In 2014, 2013, and 2012, there were 755,936, 1,027,542, and 1,254,876 restricted stock units outstanding, respectively.

Generally, awards fully vest after the passage of time, typically three years. However, restricted stock unit grants made in connection with the Company’s long-term incentive program vest after the attainment of certain performance metrics and 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; for performance-based restricted stock, dividends will be accumulated and paid after the performance criteria are met. No dividends are paid on restricted stock units.

Compensation expense is recognized using the fair market value at the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company.

Restricted share and unit activity is summarized as follows:


	2014					2013					2012
	Number of Shares			Wtg. Avg. Grant Date Fair Value per share		Number of Shares			Wtg. Avg. Grant Date Fair Value per share		Number of Shares			Wtg. Avg. Grant Date Fair Value per share
	(in thousands, except prices per share)
Nonvested at beginning of year		1,369		$	27.20		1,564		$	19.50		2,068		$	14.52
Granted		360		$	46.48		469		$	35.03		278		$	30.89
Vested		(649	)	$	20.84		(649	)	$	14.50		(782	)	$	10.37
Expired or cancelled		(42	)	$	24.69		(15	)	$	18.30		—		$	—
Nonvested at end of year		1,038		$	37.96		1,369		$	27.20		1,564		$	19.50
Aggregate value (in millions)	$	39				$	37				$	30
Wtg. Avg. remaining contractual life (in years)		1.12					0.89					0.84

The total fair value of awards for which restrictions lapsed was $14 million, $9 million, and $8 million for 2014, 2013, and 2012, respectively. At January 31, 2015, there was $12 million of total unrecognized compensation cost net of estimated forfeitures, related to nonvested restricted stock awards.