Stock-Based Compensation

6 Months Ended

Aug. 31, 2019

Share-based Payment Arrangement [Abstract]

The Company measures all employee stock-based compensation awards using a fair value method and records such expense, net of estimated forfeitures, in its consolidated financial statements. Currently, the Company's stock-based compensation relates to

restricted stock awards, stock options and performance stock units. The Company's restricted stock awards are considered nonvested share awards.

Stock-based compensation expense for the three and six months ended August 31, 2019 was approximately $12.1 million ($8.4 million after tax or $0.07 per diluted share) and approximately $31.4 million ($25.8 million after tax or $0.20 per diluted share), respectively. Stock-based compensation expense for the three and six months ended September 1, 2018 was approximately $13.4 million ($10.2 million after tax or $0.08 per diluted share) and approximately $37.0 million ($26.5 million after tax or $0.19 per diluted share), respectively. In addition, the amount of stock-based compensation cost capitalized for the six months ended August 31, 2019 and September 1, 2018 was approximately $0.5 million and $1.3 million, respectively.

Incentive Compensation Plans

The Company grants awards under the Bed Bath & Beyond 2012 Incentive Compensation Plan (the "2012 Plan") and the Bed Bath & Beyond 2018 Incentive Compensation Plan (the "2018 Plan"), which was adopted by the Company and approved by shareholders in 2018. The 2012 Plan includes an aggregate of 43.2 million common shares authorized for issuance and the 2018 Plan includes an aggregate share reserve of 4.6 million shares of common stock, resulting in a total of 47.8 million shares authorized for issuance under both plans.

The terms of the 2012 Plan and the 2018 Plan are substantially similar and enable the Company to offer incentive compensation through stock options (whether nonqualified stock options or incentive stock options), restricted stock awards, stock appreciation rights, performance awards and other stock based awards, including cash awards. Grants are determined by the Compensation Committee for those awards granted to executive officers and by an appropriate committee for all other awards granted. Stock option grants generally become exercisable in either three or five equal annual installments beginning one year from the date of grant, subject, in general, to the recipient remaining in the Company's service on specified vesting dates. Restricted stock awards generally become vested in five to seven equal annual installments beginning one to three years from the date of grant, subject, in general, to the recipient remaining in the Company's service on specified vesting dates. Performance stock units generally vest over a period of three to four years from the date of grant dependent on the Company's achievement of performance-based tests and subject, in general, to the executive remaining in the Company's service on specified vesting dates.

The Company generally issues new shares for stock option exercises, restricted stock awards and vesting of performance stock units. No grants have been made to date under the 2018 Plan, which expires in May 2028. The 2012 Plan expires in May 2022.

Stock Options

Stock option grants are issued at fair market value on the date of grant and generally become exercisable in either three or five equal annual installments beginning one year from the date of grant, subject, in general, to the recipient remaining in the Company's service on specified vesting dates. Option grants expire eight years after the date of grant. All option grants are nonqualified. As of August 31, 2019, unrecognized compensation expense related to the unvested portion of the Company's stock options was $3.7 million, which is expected to be recognized over a weighted average period of 3.4 years.

The fair value of the stock options granted was estimated on the date of the grant using a Black-Scholes option-pricing model that uses the assumptions noted in the following table.



	Six Months Ended
Black-Scholes Valuation Assumptions (1)	August 31, 2019		September 1, 2018
Weighted Average Expected Life (in years) (2)	7.6		6.7
Weighted Average Expected Volatility (3)	39.41	%	34.96	%
Weighted Average Risk Free Interest Rates (4)	2.39	%	2.92	%
Expected Dividend Yield (5)	4.34	%	3.80	%

(1) Forfeitures are estimated based on historical experience.

(2) The expected life of stock options is estimated based on historical experience.

(3) Expected volatility is based on the average of historical and implied volatility. The historical volatility is determined by observing actual prices of the Company's stock over a period commensurate with the expected life of the awards. The implied volatility represents the implied volatility of the Company's call options, which are actively traded on multiple exchanges, had remaining maturities in excess of twelve months, had market prices close to the exercise prices of the employee stock options and were measured on the stock option grant date.

(4) Based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options.

(5) Expected dividend yield is estimated based on anticipated dividend payouts.

Changes in the Company's stock options for the six months ended August 31, 2019 were as follows:



(Shares in thousands)	Number of Stock Options		Weighted Average Exercise Price
Options outstanding, beginning of period	4,395		$	47.53
Granted	144		15.68
Exercised	—		—
Forfeited or expired	(2,607	)	53.86
Options outstanding, end of period	1,932		$	36.62
Options exercisable, end of period	1,094		$	45.83

The weighted average fair value for the stock options granted during the first six months of fiscal 2019 and 2018 was $4.18 and $4.31, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding as of August 31, 2019 was 5.3 years and $0, respectively. The weighted average remaining contractual term for options exercisable as of August 31, 2019 was 4.4 years and the aggregate intrinsic value was $0. There were no stock options exercised during the first six months of fiscal 2019 and 2018.

Restricted Stock

Restricted stock awards are issued and measured at fair market value on the date of grant and generally become vested in five to seven equal annual installments beginning one to three years from the date of grant, subject, in general, to the recipient remaining in the Company's service on specified vesting dates. Vesting of restricted stock is based solely on time vesting. As of August 31, 2019, unrecognized compensation expense related to the unvested portion of the Company's restricted stock awards was $88.4 million, which is expected to be recognized over a weighted average period of 3.9 years.

Changes in the Company's restricted stock for the six months ended August 31, 2019 were as follows:



(Shares in thousands)	Number of Restricted Shares		Weighted Average Grant-Date Fair Value
Unvested restricted stock, beginning of period	3,747		$	41.73
Granted	880		13.52
Vested	(689	)	50.47
Forfeited	(424	)	36.73
Unvested restricted stock, end of period	3,514		$	33.56

Performance Stock Units

Performance stock units ("PSUs") are issued and measured at fair market value on the date of grant. Vesting of PSUs awarded to certain of the Company's executives is dependent on the Company's achievement of a performance-based test during a one-year period from the date of grant and during a three-year period from the date of grant and, assuming achievement of the performance-based test, time vesting over periods of up to four years, subject, in general, to the executive remaining in the Company's service on specified vesting dates. For awards granted in fiscal 2018 and prior, performance during the three-year period were based on Return on Invested Capital ("ROIC") or a combination of Earnings Before Interest and Taxes ("EBIT") margin and ROIC relative to a peer group. For awards granted in fiscal 2019, performance during a one-year period is based on a one-year Company EBIT goal and performance during the three-year period is based on a three-year cumulative Company EBIT goal and a relative three-year Total Shareholder Return ("TSR") goal relative to a peer group. The PSU awards range from a floor of zero to a cap of 150% of target achievement. PSUs are converted into shares of common stock upon payment following vesting. Upon grant of the PSUs, the Company recognizes compensation expense related to these awards based on the Company's estimate of the percentage of the award that will be achieved. The Company evaluates the estimate on these awards on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. As of August 31, 2019, unrecognized compensation expense related to the unvested portion of the Company's performance stock units was $7.5 million, which is expected to be recognized over a weighted average period of 2.0 years.

The fair value of the PSUs granted in fiscal 2019 for which performance during the three-year period will be based on a relative three-year Total Shareholder Return ("TSR") goal relative to a peer group was estimated on the date of the grant using a Monte Carlo simulation that uses the assumptions noted in the following table.



	Six Months Ended
Monte Carlo Simulation Assumptions	August 31, 2019
Risk Free Interest Rate	1.7	%
Expected Dividend Yield	—	%
Expected Volatility	43.40	%
Expected Term	3 years

Changes in the Company's PSUs for the six months ended August 31, 2019 were as follows:



(Shares in thousands)	Number of Performance Stock Units		Weighted Average Grant-Date Fair Value
Unvested performance stock units, beginning of period	2,082		$	27.16
Granted	821		11.02
Vested	(557	)	35.09
Forfeited or performance condition adjustments	(173	)	24.87
Unvested performance stock units, end of period	2,173		$	19.21