Annual report pursuant to Section 13 and 15(d)

Stock Based Compensation

v3.20.1
Stock Based Compensation
12 Months Ended
Feb. 01, 2020
Share-based Payment Arrangement, Noncash Expense [Abstract]  
Stock Based Compensation
Stock-Based Compensation
The following disclosures present the Company’s equity plans on a combined basis. The equity plans are administered by the Compensation and Management Development Committee of the Board of Directors (the “CMD Committee”). The CMD Committee is authorized to grant options, stock appreciation rights, restricted stock and restricted stock units to officers and key employees of the Company and its subsidiaries and to non-employee directors. The equity plans are intended to help the Company attract and retain directors, officers, other key executives and employees and is also intended to provide incentives and rewards relating to the Company’s business plans to encourage such persons to devote themselves to the business of the Company. There have been no grants of stock appreciation rights under the equity plans.
Stock option grants have an exercise price at least equal to the market value of the underlying common stock on the date of grant, have ten-year terms and typically vest ratably over four years of continued employment. Restricted stock and time-based restricted stock unit awards generally vest one to four years from the date of grant. Performance-based restricted stock units generally are earned based on the attainment of specified goals achieved over the performance period.
As of February 1, 2020, approximately 17 million shares of common stock were available for additional grants pursuant to the Company’s equity plans. Shares awarded are generally issued from the Company's treasury stock.
Stock-based compensation expense included the following components:
 
 
2019
 
2018
 
2017
 
(millions)
Stock options
$
15

 
$
24

 
$
34

Restricted stock units
23

 
39

 
24

 
$
38

 
$
63

 
$
58



All stock-based compensation expense is recorded in SG&A expense in the Consolidated Statements of Income.
Stock Options
The fair value of stock options granted during 2019, 2018 and 2017 and the weighted average assumptions used to estimate the fair value are as follows:
 
 
2019
 
2018
 
2017
Weighted average grant date fair value of stock options
granted during the period
$
5.11

 
$
7.43

 
$
5.84

Dividend yield
6.3
%
 
5.2
%
 
6.2
%
Expected volatility
40.6
%
 
41.1
%
 
41.8
%
Risk-free interest rate
2.4
%
 
2.7
%
 
1.9
%
Expected life
5.5 years

 
5.6 years

 
5.7 years



The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company estimates the expected volatility and expected option life assumption consistent with ASC Topic 718, Compensation – Stock Compensation. The expected volatility of the Company’s common stock at the date of grant is estimated based on a historic volatility rate and the expected option life is calculated based on historical stock option experience as the best estimate of future exercise patterns. The dividend yield assumption is based on historical and anticipated dividend payouts. The risk-free interest rate assumption is based on observed interest rates consistent with the expected life of each stock option grant. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. Compensation expense is recorded for all stock options expected to vest based on the amortization of the fair value at the date of grant on a straight-line basis primarily over the vesting period of the options.

Activity related to stock options for 2019 is as follows:
 
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
(thousands)
 
 
 
(years)
 
(millions)
Outstanding, beginning of period
18,893

 
$
39.73

 
 
 
 
Granted
1,994

 
23.94

 
 
 
 
Canceled or forfeited
(1,731
)
 
32.73

 
 
 
 
Exercised
(657
)
 
9.08

 
 
 
 
Outstanding, end of period
18,499

 
$
39.77

 
 
 
 
Exercisable, end of period
14,258

 
$
42.97

 
4.2
 
$

Options expected to vest
3,133

 
$
29.20

 
7.9
 
$



Additional information relating to stock options is as follows:
 
 
2019
 
2018
 
2017
 
(millions)
Intrinsic value of options exercised
$
10

 
$
27

 
$
3

Cash received from stock options exercised
6

 
45

 
6



As of February 1, 2020, the Company had $15 million of unrecognized compensation costs related to nonvested stock options, which is expected to be recognized over a weighted average period of approximately 2.2 years.

Restricted Stock Units
The weighted average grant date fair values of performance-based and time-based restricted stock units granted during 2019, 2018 and 2017 are as follows:
 
 
2019
 
2018
 
2017
Restricted stock units (performance-based)
$
24.28

 
$
30.64

 
$
27.16

Restricted stock units (time-based)
17.81

 
25.57

 
20.75



During 2019, 2018 and 2017, the CMD Committee approved awards of performance-based restricted stock units to certain senior executives of the Company. Each award reflects a target number of shares (“Target Shares”) that may be issued to the award recipient. These awards may be earned upon the completion of three-year performance periods ending January 29, 2022, January 30, 2021 and February 1, 2020, respectively. Whether units are earned at the end of the performance period will be determined based on the achievement of certain performance objectives over the performance period. The performance objectives include achieving an EBITDA as a percent to sales ratio, owned plus licensed comparable sales growth and a return on invested capital ratio. The performance-based restricted stock units also include a performance objective relating to relative total shareholder return (“TSR”). Relative TSR reflects the change in the value of the Company’s common stock over the performance period in relation to the change in the value of the common stock of an executive compensation peer group over the performance period, assuming the reinvestment of dividends. Depending on the results achieved during the three-year performance periods, the actual number of shares that a grant recipient receives at the end of the period may range from 0% to 200% of the Target Shares granted.

The fair value of the Target Shares and restricted stock awards are based on the fair value of the underlying shares on the date of grant. The fair value of the portion of the Target Shares that relate to a relative TSR performance objective was determined using a Monte Carlo simulation analysis to estimate the total shareholder return ranking of the Company
among an executive compensation peer group over the remaining performance periods. The expected volatility of the Company’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate three-year performance period. The dividend yield assumption was based on historical and anticipated dividend payouts. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate three-year performance measurement period.
The fair value of a restricted stock unit award at the grant date is equal to the market price of the Company's common stock on the grant date. Compensation expense is recorded for all restricted stock unit awards based on the amortization of the fair market value at the date of grant over the period the restrictions lapse or over the performance period of the performance-based restricted stock units. As of February 1, 2020, the Company had $43 million of unrecognized compensation costs related to nonvested restricted stock units, which is expected to be recognized over a weighted average period of approximately 2.0 years.
 
Activity related to restricted stock units for 2019 is as follows:
 
 
Shares
 
Weighted
Average
Grant Date
Fair Value
 
(thousands)
 
 
Nonvested, beginning of period
4,143

 
$
26.33

Granted – performance-based
861

 
24.28

Performance adjustment
(26
)
 
28.17

Granted – time-based
1,443

 
17.81

Forfeited
(909
)
 
23.88

Vested
(765
)
 
29.19

Nonvested, end of period
4,747

 
$
23.37