22. 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. As of January 30, 2016, there were 13,038,597 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, 996 participating employees purchased 124,494 shares in 2015, and 958 participating employees purchased 160,859 shares in 2014. As of January 30, 2016, there were 2,714,647 shares available for purchase under this plan.

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:



	2015		2014		2013
	($ in millions)
Options and shares purchased under the employee stock purchase plan	$	11	$	13	$	12
Restricted stock and restricted stock units		11		11		13
Total share-based compensation expense	$	22	$	24	$	25

Tax benefit recognized	$	8	$	7	$	8
Excess income tax benefit from settled equity-classified share-based awards reported as a cash flow from financing activities	$	35	$	12	$	9

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
	2015		2014		2013		2015		2014		2013
Weighted-average risk free rate of interest	1.5	%	2.1	%	1.0	%	0.2	%	0.1	%	0.2	%
Expected volatility	30	%	39	%	42	%	25	%	24	%	40	%
Weighted-average expected award life (in years)	6.0		6.1		6.0		1.0		1.0		1.0
Dividend yield	1.6	%	1.9	%	2.3	%	1.6	%	2.0	%	2.3	%
Weighted-average fair value	$16.07		$15.30		$10.98		$10.47		$7.35		$5.79

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 31, 2015	5,569			$	25.89
Granted	694				62.29
Exercised	(2,511)				25.50
Expired or cancelled	(58)				49.17
Options outstanding at January 30, 2016	3,694		5.6	$	32.62
Options exercisable at end of year	2,495		4.1	$	22.56
Options vested and expected to vest	3,662		5.5	$	32.40

The total fair value of options vested during 2015, 2014, and 2013 was $15 million, $9 million, and $8 million, respectively.

The Company received $64 million in cash from option exercises for the year ended January 30, 2016. 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:



	2015		2014		2013
	($ in millions)
Exercised	$	99	$	22	$	21

The tax benefit realized from option exercises was $38 million, $8 million, and $7 million for 2015, 2014, and 2013, 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:



	2015
	($ in millions)
Outstanding	$	129
Outstanding and exercisable	$	112
Vested and expected to vest	$	129

As of January 30, 2016, 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 1.4 years.

The following table summarizes information about stock options outstanding and exercisable at January 30, 2016:



	Options Outstanding				Options Exercisable
		Weighted-
		Average		Weighted-			Weighted-
		Remaining		Average			Average
	Number	Contractual		Exercise	Number		Exercise
Range of Exercise Prices	Outstanding	Life		Price	Exercisable		Price
	(in thousands, except prices per share and contractual life)
$9.85 to $18.80	858	2.7	$	13.32	858	$	13.32
$18.84 to $24.75	855	3.3		19.80	855		19.80
$30.92 to $36.59	784	6.5		32.84	611		32.44
$45.08 to $73.21	1,197	8.7		55.48	171		47.42
	3,694	5.6	$	32.62	2,495	$	22.56

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 executives outside of the United States and to nonemployee directors. Each RSU represents the right to receive one share of the Company’s common stock provided that the vesting conditions are satisfied. In 2015, 2014, and 2013, there were 588,308, 755,936, and 1,027,542 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 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. With regards 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 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 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 beginning of year		1,038		$	37.96
Granted		155			63.73
Vested		(322)			32.34
Expired or cancelled		(68)			37.97
Nonvested at end of year		803	0.8	$	45.19
Aggregate value ($ in millions)	$	36

The total fair value of awards for which restrictions lapsed was $10 million, $14 million, and $9 million for 2015, 2014, and 2013, respectively. At January 30, 2016, there was $10 million of total unrecognized compensation cost net of estimated forfeitures, related to nonvested restricted stock awards.