Equity and Incentive Compensation Plans

Preferred Stock

At January 31, 2015, February 1, 2014 and February 2, 2013, there were two million shares of preferred stock, par value $0.01, authorized and unissued.

Associate Discount Stock Purchase Plan

In Fiscal 1999, the Company established an Associate Discount Stock Purchase Plan (the “Stock Purchase Plan”). Under the terms of the Stock Purchase Plan, as amended, eligible employees may purchase shares of the Company’s common stock quarterly, at a price equal to 85% of the lower of the closing price of the Company’s common stock at the beginning or end of each quarterly stock purchase period. Participating employees pay for their stock purchases under the Stock Purchase Plan by authorizing limited payroll deductions of up to a maximum of 15% of their compensation. During Fiscal 2014, 62,895 shares were issued pursuant to the Stock Purchase Plan, at an average discount of $5.78 per share. At January 31, 2015, there were 1,289,633 shares available for future issuance under the Stock Purchase Plan. The Company recorded approximately $0.5 million, $0.5 million and $0.6 million in compensation expense related to the Stock Purchase Plan during Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively.

Stock Incentive Plans

The Company has two active stock incentive plans (the “Plans”), which are summarized below:

Shares Reserved

for Issuance at

January 31, 2015

Available

for Future

Grant

Defined

Name

Plan Name

Restricted

Stock/Units (1)

Total

Authorized

2002 Plan

2002 Stock Option and Restricted Stock and Unit Award Plan

787,500

4,500,000

145,726

—

2003 Plan

2003 Equity Incentive Plan

7,434,432

13,424,432

4,433,729

2,882,232


(1)	Included in the number of total authorized shares. The Company may issue restricted stock or restricted unit grants up to the levels provided under each plan, however shares not used for this purpose are available for issuance as stock option grants.

On May 30, 2013, the Company’s shareholders approved certain amendments to the Company’s 2003 Equity Incentive Plan, including increasing the total authorized shares reserved for issuance from 11.75 million to 13.4 million common shares.

Stock option awards under the Plans are granted at exercise prices equal to the U.S. dollar market value of the Company’s common stock on the grant date (determined in accordance with the applicable Plan), generally vest over three years and expire no later than ten years after the grant date. Each of the Plans also includes an acceleration clause by which all options not exercisable by their terms will, upon the occurrence of certain contingent events, become exercisable. Shares underlying stock award grants are generally issued out of treasury stock. The Plans allow for restricted stock awards and restricted unit awards. A restricted unit represents the right to receive a share of common stock and/or the cash value of a share of common stock on the date the restrictions on the restricted unit lapse. The restrictions on time-vesting restricted stock or restricted unit grants generally lapse over a three-year period from the date of the grant. Performance-vesting restricted stock grants also generally vest over three years if certain pre-established targets are met. In the event a grantee terminates employment with the Company, any unvested stock options and any restricted stock or restricted units still subject to restrictions are generally forfeited.

General

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeiture rates differ from initial estimates. In Fiscal 2014, Fiscal 2013 and Fiscal 2012, stock-based compensation expense was recorded net of estimated forfeitures, such that expense was recorded only for those stock-based awards that are expected to vest.

During the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013, the Company recognized approximately $13.7 million, $16.3 million and $17.0 million, respectively, in total stock-based compensation expense. Stock-based compensation expense is included on the same income statement line item as the cash compensation paid to the recipient of the stock-based award, with the majority of this stock-based compensation expense included in selling, general and administrative expenses. The associated tax benefit recognized in the Consolidated Statements of Operations for the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013 was approximately $5.6 million, $6.2 million and $7.9 million, respectively.

9. Equity and Incentive Compensation Plans (Continued)

General (continued)

In addition, cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for stock-based compensation arrangements (“excess tax benefits”) are classified as financing cash flows. For the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013, excess tax benefits realized from stock-based compensation arrangements were $1.9 million, $3.0 million and $9.2 million, respectively. The Company received $14.5 million, $12.6 million and $34.8 million in cash from the exercise of stock options during the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013, respectively.

Stock Options

The Company recognizes stock option expense equal to the grant date fair value on a straight-line basis over the requisite service period, which is generally the vesting period, net of estimated forfeitures. As of January 31, 2015, there was $1.4 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a remaining weighted average vesting period of 1.6 years. The total intrinsic value of options exercised was approximately $5.3 million, $7.3 million and $26.1 million during Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively.

The following table summarizes stock option activity for the fiscal year ended January 31, 2015:



	Shares		Weighted Average Exercise Price
Options outstanding at February 1, 2014	2,199,719		$	26.60
Granted (1)	63,700		37.52
Exercised	(498,388	)	29.00
Forfeited or expired	(67,808	)	29.95
Options outstanding at January 31, 2015	1,697,223		$	26.17
Vested and exercisable at January 31, 2015	1,474,576		$	25.34
Options expected to vest in the future as of January 31, 2015	204,513		$	31.92


(1)	Options granted during Fiscal 2014 vest annually over a three-year period and expire ten years after the grant date.

The weighted average fair value of options granted during the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013, estimated as of the grant date using the Black-Scholes option pricing model, was $16.79, $13.73 and $12.47 per share, respectively. The weighted average remaining contractual term for options outstanding at January 31, 2015 and February 1, 2014 was 4.4 years and 5.1 years, respectively. The weighted average remaining contractual term for options vested and exercisable at January 31, 2015 was 3.9 years. The weighted average remaining contractual term for options expected to vest in the future at January 31, 2015 was 8.1 years. At January 31, 2015, the aggregate intrinsic value of options outstanding, options vested and exercisable and options expected to vest was $12.9 million, $12.3 million, and $0.5 million, respectively.

Option valuation models require the input of highly subjective assumptions, including expected stock price volatility. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. The fair value of options granted under the Plans was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:



	Fiscal Year Ended
	January 31, 2015		February 1, 2014		February 2, 2013
Expected volatility	47.5	%	50.9	%	54.6	%
Risk-free interest rate	1.7	%	0.9	%	0.9	%
Expected life (years)	5.4		4.9		4.4
Dividend yield	—		—		—

9. Equity and Incentive Compensation Plans (Continued)

Stock Options (continued)

The risk-free rate is based on a zero-coupon U.S. Treasury rate in effect at the time of grant with maturity dates that coincide with the expected life of the options. The expected life of the options is based on a calculation of the Company’s historical exercise patterns to estimate future exercise patterns. The expected volatility for grants is based on a simple average of (i) historical volatility of stock price returns using daily closing prices and (ii) the volatility implied by exchange-traded call options to purchase the Company’s common stock, to the extent sufficient data for the latter is available. Historical volatility was calculated as of the grant date using stock price data over periods of time equal in duration to the expected life of the options granted. In assessing implied volatility data, the Company analyzed call option market activity during the three-month period preceding the grant date. The Company also considered the volume of market activity of the underlying shares and traded options, the similarity of the exercise prices of traded options to the exercise price of employee stock options exercised during the period and traded options whose terms are close to the expected term of the employee stock options.

Restricted Stock

The fair value of restricted stock awards is based on the market price of the Company’s common stock on the date of grant (determined in accordance with the applicable Plan) and is amortized to compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period (assuming pre-established targets were met in the case of performance-vesting restricted stock awards), net of estimated forfeitures. As of January 31, 2015, there was $12.9 million of unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over a remaining weighted average vesting period of 2.8 years. The weighted average grant date fair value of restricted stock awards granted during the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013 was $37.54, $30.87, and $28.18, respectively. The total fair value of restricted stock awards vested during the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013 was $12.4 million, $8.4 million and $11.7 million, respectively.

The following table summarizes restricted stock activity for the fiscal year ended January 31, 2015:



	Time - Vesting					Performance - Vesting
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Restricted stock awards at February 1, 2014	602,205			$	29.95	289,935			$	29.56
Granted	409,906		(1)	37.55		141,617		(2)	37.53
Vested	(216,616	)		28.92		(124,139	)		29.24
Forfeited	(147,865	)		32.73		(85,350	)		31.48
Restricted stock awards at January 31, 2015	647,630			34.47		222,063			34.08


(1)	Of this amount, 24,406 shares vest in June 2015; 127,700 shares vest in equal installments in each of March 2015, 2016 and 2017; 255,900 shares vest in equal installments in each of March 2017, 2018 and 2019; and 1,900 shares vest in equal installments in each of June 2015, 2016 and 2017.


(2)	These shares vest over a three-year period based on achievement of performance targets set bi-annually for each tranche of the grant. Based on Company performance, grantees may earn 50% to 150% of the shares granted with respect to each tranche. If the Company does not achieve the minimum threshold target associated with such shares, grantees will not earn any shares with respect to that tranche.

Restricted Units

The fair value of restricted unit awards is based on the market price of the Company’s common stock on the date of grant (determined in accordance with the applicable Plan) and is amortized to compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period, net of estimated forfeitures. All previously issued restricted units were fully vested during Fiscal 2013. As of January 31, 2015 and February 1, 2014, there were no restricted unit awards outstanding.

9. Equity and Incentive Compensation Plans (Continued)

Long-Term Performance Compensation

The Company maintains a long-term cash incentive program, the Restricted Cash Program (“RCP”), for vice-presidents and above. Corporate operating profit is the performance metric applied in determining amounts earned under the RCP, and any such earnings are banked and mandatorily deferred until the end of the third fiscal year following the earnings period. Amounts banked are adjusted upwards or downwards by the average percentage increase or decrease, as the case may be, of the Company’s corporate net income performance over the mandatory three-year deferral period. Such corporate net income performance may be modified for certain unusual or infrequently occurring events to avoid distorting operating fundamentals and thereby benefiting or penalizing management for the financial impact of such unusual or infrequent events. The Company estimates corporate net income performance based on past results, future business trends and new business initiatives.

In order to receive payments under the RCP, participants must be employed by the Company at the end of the mandatory three-year deferral period, except in limited circumstances. Amounts banked under the RCP are recorded as compensation expense on a pro-rata basis over the service period, net of estimated forfeitures, to the same income statement line item as the base salary earned by participating associates. The service period includes the fiscal year in which amounts earned under the program are banked, plus the mandatory three-year deferral period. The Company estimates forfeitures based on historical RCP forfeiture patterns, as well as future trends of expected behavior. Any adjustments to compensation expense associated with changes in corporate net income performance or estimated forfeiture rates during the service period are accounted for as changes in estimate.

During the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013, the Company recognized $5.0 million, $11.0 million and $18.5 million in compensation expense under the RCP, inclusive of the effect of changes in estimates. RCP compensation expense for Fiscal 2014 also reflects the impact of changes in forfeiture rate estimates recorded during the first quarter of Fiscal 2014 in connection with the Company's restructuring. As of January 31, 2015, there was $15.0 million of unrecognized compensation cost under the RCP, which is expected to be recognized over a remaining weighted average deferral period of 2.5 years.