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 share-based awards may be granted to nonemployee directors, officers and other employees of the Company, including its subsidiaries and operating divisions worldwide. 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 February 2, 2019, there were 8,762,073 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 2,475,699 shares available for purchase as of February 2, 2019. During 2018 and 2017, participating employees purchased 48,196 shares and 109,790 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:




	2018		2017		2016
	($ in millions)
Options and shares purchased under the ESPP	$	7	$	9	$	10
Restricted stock and restricted stock units		15		6		12
Total share-based compensation expense	$	22	$	15	$	22

Tax benefit recognized	$	3	$	4	$	6

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



	Stock Option Plans									Stock Purchase Plan
	2018			2017			2016			2018			2017			2016
Weighted-average risk free rate of interest		2.7	%		2.1	%		1.4	%		2.0	%		1.0	%		0.5	%
Expected volatility		37	%		25	%		30	%		50	%		30	%		27	%
Weighted-average expected award life (in years)		5.5			5.4			5.7			1.0			1.0			1.0
Dividend yield		3.1	%		1.9	%		1.7	%		2.0	%		2.0	%		1.8	%
Weighted-average fair value	$	12.42		$	14.74		$	15.71		$	15.29		$	10.96		$	13.33

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 the beginning of the year	2,739			$	52.45
Granted	397				44.95
Exercised	(163)				30.73
Expired or cancelled	(112)				60.41
Options outstanding at February 2, 2019	2,861		6.0	$	52.34
Options exercisable at February 2, 2019	1,994		5.0	$	50.13

The total fair value of options vested during 2018 and 2017 was $8 million and was $9 million during 2016.

During the year ended February 2, 2019, the Company received $5 million in cash from option exercises and recognized a related tax benefit of $1 million. 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:


	2018		2017		2016
	($ in millions)
Exercised	$	4	$	22	$	56

The aggregate intrinsic value for stock options outstanding, and those outstanding and exercisable (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:


	2018
	($ in millions)
Outstanding	$	24
Outstanding and exercisable	$	20

As of February 2, 2019, there was $4 million of total unrecognized compensation cost 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 February 2, 2019:


	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 $18.84	225	1.7	$	17.10	225	$	17.10
$24.75 to $34.75	384	4.0		32.11	346		31.82
$44.78 to $45.75	649	7.2		44.92	295		45.08
$46.64 to $62.11	693	5.7		60.63	660		61.19
$63.79 to $73.21	910	7.5		68.57	468		67.19
	2,861	6.0	$	52.34	1,994	$	50.13

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. Additionally, 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 2018, 2017, and 2016 there were 1,022,895, 360,782, and 648,588 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 stock 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		374			$	59.15
Granted (1)		683				45.49
Vested		(106)				64.32
Performance adjustment (2)		158
Expired or cancelled		(87)				58.41
Nonvested at February 2, 2019		1,022		1.9	$	47.47
Aggregate value ($ in millions)	$	49

(1)

Approximately 0.4 million performance-based RSUs were granted during 2018 and are included as granted in the table above. The number of performance-based RSUs that are ultimately earned may vary from 0% to 200% of target depending on the achievement relative to the Company’s predefined financial performance targets.

(2)

Represents adjustments that were made to performance-based RSUs previously granted. These adjustments reflect changes in estimates based upon the Company’s current performance against predefined financial targets.

The total fair value of awards for which restrictions lapsed was $7 million, $15 million, and $9 million for 2018, 2017, and 2016, respectively. At February 2, 2019, there was $29 million of total unrecognized compensation cost related to nonvested restricted stock and RSU awards.