SHARE-BASED COMPENSATION

Financial Statement Impact

The Company recognized share-based compensation expense of $22.1 million, $28.4 million and $23.0 million for Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. The Company also recognized tax benefits related to share-based compensation of $8.3 million, $10.6 million and $8.6 million for Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively.

The fair value of share-based compensation awards is recognized as compensation expense primarily on a straight-line basis over the awards’ requisite service period, net of estimated forfeitures, with the exception of performance share awards. Performance share award expense is primarily recognized in the performance period of the awards’ requisite service period. For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation expense is recognized. A current tax deduction arises upon the vesting of restricted stock units and performance share awards or the exercise of stock options and stock appreciation rights and is principally measured at the award’s intrinsic value. If the tax deduction is greater than the recorded deferred tax asset, the tax benefit associated with any excess deduction is considered an excess tax benefit and is recognized as additional paid-in capital. If the tax deduction is less than the recorded deferred tax asset, the resulting difference, or shortfall, is first charged to additional paid-in capital, to the extent of the windfall pool of excess tax benefits, with any remainder recognized as tax expense. See Note 2, “SUMMARY OF SIGNIFICANT ACCOUTING POLICIES - Recent accounting pronouncements,” of the Notes to the Consolidated Financial Statements for recent accounting pronouncements, including the expected date of adoption and anticipated effect on our Consolidated Financial Statements, related to changes in the financial reporting of stock compensation.

The Company adjusts share-based compensation expense on a quarterly basis for actual forfeitures and for changes to the estimate of expected award forfeitures. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. The effect of adjustments for forfeitures was $3.4 million, $5.6 million and $2.6 million for Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively.

The Company issues shares of Common Stock from treasury stock upon exercise of stock options and stock appreciation rights and vesting of restricted stock units, including those converted from performance share awards. As of January 28, 2017, the Company had sufficient treasury stock available to settle stock options, stock appreciation rights, restricted stock units and performance share awards outstanding. Settlement of stock awards in Common Stock also requires that the Company have sufficient shares available in stockholder-approved plans at the applicable time.

In the event, at each reporting date as of which share-based compensation awards remain outstanding, there are not sufficient shares of Common Stock available to be issued under the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Directors (the “2016 Directors LTIP”) and the Abercrombie & Fitch Co. 2016 Long-Term Incentive Plan for Associates (the “2016 Associates LTIP”), or under a successor or replacement plan, the Company may be required to designate some portion of the outstanding awards to be settled in cash, which would result in liability classification of such awards. The fair value of liability-classified awards is re-measured each reporting date until such awards no longer remain outstanding or until sufficient shares of Common Stock become available to be issued under the existing plans or under a successor or replacement plan. As long as the awards are required to be classified as a liability, the change in fair value would be recognized in current period expense based on the requisite service period rendered.

Plans

As of January 28, 2017, the Company had two primary share-based compensation plans: (i) the 2016 Directors LTIP, with 350,000 shares of the Company's Common Stock authorized for issuance, under which the Company is authorized to grant stock options, stock appreciation rights, restricted stock, restricted stock units and deferred stock awards to non-associate members of the Company's Board of Directors; and (ii) the 2016 Associates LTIP, with 3,500,000 shares of the Company's Common Stock authorized for issuance, under which the Company is authorized to grant stock options, stock appreciation rights, restricted stock, restricted stock units and performance share awards to associates of the Company. The Company also has six other share-based compensation plans under which it granted stock options, stock appreciation rights, restricted stock units and performance share awards to associates of the Company and stock options and restricted stock units to non-associate members of the Company’s Board of Directors in prior years.

The 2016 Directors LTIP, a stockholder-approved plan, permits the Company to annually grant awards to non-associate directors, subject to the following limits:


•	For non-associate directors: awards with an aggregate fair market value on the date of the grant of no more than $300,000;


•	For the non-associate director occupying the role of Non-Executive Chairman of the Board (if any): additional awards with an aggregate fair market value on the date of grant of no more than $500,000; and


•	For the non-associate director occupying the role of Executive Chairman of the Board (if any): additional awards with an aggregate fair market value on the date of grant of no more than $2,500,000.

Under the 2016 Directors LTIP, restricted stock units are subject to a minimum vesting period ending no sooner than the early of (i) the first anniversary of the grant date or (ii) the date of the next regularly scheduled annual meeting of stockholders held after the grant date.

The 2016 Associates LTIP, a stockholder-approved plan, permits the Company to annually grant one or more types of awards covering up to an aggregate of 1.0 million of underlying shares of the Company’s Common Stock to any associate of the Company. Under the 2016 Associates LTIP, for restricted stock units that have performance-based vesting, performance must be measured over a period of at least one year and restricted stock units that do not have performance-based vesting, vesting in full may not occur more quickly than in pro-rata installments over a period of three years from the date of the grant, with the first installment vesting no sooner than the first anniversary of the date of the grant.

Under the 2016 Directors LTIP, any stock options or stock appreciation rights granted must have a minimum vesting period ending no sooner than the earlier of (i) the first anniversary of the grant date or (ii) the date of the next regularly scheduled annual meeting of the stockholders held after the grant date and must have a term that does not exceed a period of ten years from the grant date, subject to forfeiture under the terms of the 2016 Directors LTIP. Under the 2016 Associates LTIP, any stock options or stock appreciation rights granted must have a minimum vesting period of one year and a term that does not exceed a period of ten years from the grant date, subject to forfeiture under the terms of the 2016 Associates LTIP.

Each of the 2016 Directors LTIP and the 2016 Associates LTIP provide for accelerated vesting of awards if there is a change of control and certain other conditions specified in each plan are met.

Stock Options

The following table summarizes stock option activity for Fiscal 2016:



	Number of Underlying Shares		Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life
Outstanding at January 30, 2016	271,000		$	63.05
Granted	—		—
Exercised	(2,000	)	22.87
Forfeited or expired	(79,200	)	31.53
Outstanding at January 28, 2017	189,800		$	76.62	$	—	0.7
Stock options exercisable at January 28, 2017	189,900		$	76.62	$	—	0.7

The Company did not grant any stock options during Fiscal 2016, Fiscal 2015 and Fiscal 2014. The total intrinsic value of stock options exercised was insignificant during Fiscal 2016, Fiscal 2015 and Fiscal 2014. As of January 28, 2017, there was no unrecognized compensation cost related to currently outstanding stock options.

Stock Appreciation Rights

The following table summarizes stock appreciation rights activity for Fiscal 2016:



	Number of Underlying Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life
Outstanding at January 30, 2016	5,301,115		$	45.02
Granted	—		—
Exercised	(10,483	)	22.45
Forfeited or expired	(1,211,582	)	37.19
Outstanding at January 28, 2017	4,079,050		$	47.49	$	—	2.6
Stock appreciation rights exercisable at January 28, 2017	3,532,119		$	50.62	$	—	1.9
Stock appreciation rights expected to become exercisable in the future as of January 28, 2017	436,030		$	27.72	$	—	7.7

The Company estimates the fair value of stock appreciation rights using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock appreciation rights and expected future stock price volatility over the expected term. Estimates of expected terms, which represent the expected periods of time the Company believes stock appreciation rights will be outstanding, are based on historical experience. Estimates of expected future stock price volatility are based on the volatility of the Company’s Common Stock price for the most recent historical period equal to the expected term of the stock appreciation right, as appropriate. The Company calculates the volatility as the annualized standard deviation of the differences in the natural logarithms of the weekly stock closing price, adjusted for stock splits and dividends.

No stock appreciation rights were granted in Fiscal 2016. The weighted-average assumptions used in the Black-Scholes option-pricing model for stock appreciation rights granted during Fiscal 2015 and Fiscal 2014 were as follows:



	Executive Officers						All Other Associates
	2015			2014			2015			2014
Grant date market price	$	22.46		$	35.08		$	22.42		$	37.05
Exercise price	$	22.46		$	35.49		$	22.42		$	37.22
Fair value	$	9.11		$	12.85		$	8.00		$	12.92
Assumptions:
Price volatility	49		%	49		%	49		%	50		%
Expected term (years)	6.1			4.9			4.3			4.1
Risk-free interest rate	1.5		%	1.6		%	4.2		%	1.4		%
Dividend yield	1.7		%	2.0		%	1.7		%	1.9		%

Compensation expense for stock appreciation rights is recognized on a straight-line basis over the awards’ requisite service period, net of forfeitures. As of January 28, 2017, there was $2.5 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock appreciation rights. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 13 months.

The total intrinsic value of stock appreciation rights exercised during Fiscal 2016, Fiscal 2015 and Fiscal 2014 was $0.1 million, $4.3 million and $1.5 million, respectively. The grant date fair value of stock appreciation rights that vested during Fiscal 2016, Fiscal 2015 and Fiscal 2014 was $4.3 million, $4.9 million and $7.4 million, respectively.

Restricted Stock Units

The following table summarizes activity for restricted stock units for Fiscal 2016:



	Service-based Restricted Stock Units				Performance-based Restricted Stock Units				Market-based Restricted Stock Units
	Number of Underlying Shares		Weighted- Average Grant Date Fair Value		Number of Underlying Shares		Weighted- Average Grant Date Fair Value		Number of Underlying Shares		Weighted- Average Grant Date Fair Value
Unvested at January 30, 2016	1,671,597		$	28.13	185,500		$	23.42	117,711		$	25.00
Granted	1,182,198		24.57		129,725		25.70		129,734		31.01
Adjustments for performance achievement	—		—		—		—		—		—
Vested	(678,033	)	29.96		(32,625	)	36.12		—		—
Forfeited	(260,301	)	26.81		(78,677	)	24.22		(62,553	)	31.91
Unvested at January 28, 2017	1,915,461		$	25.47	203,923		$	22.53	184,892		$	26.89

Fair value of both service-based and performance-based restricted stock units is calculated using the market price of the underlying common stock on the date of grant reduced for anticipated dividend payments on unvested shares. In determining fair value, the Company does not take into account performance-based vesting requirements. Performance-based vesting requirements are taken into account in determining the number of awards expected to vest. For market-based restricted stock units, fair value is calculated using a Monte Carlo simulation with the number of shares that ultimately vest dependent on the Company’s total stockholder return measured against the total stockholder return of a select group of peer companies over a three-year period. For an award with performance-based or market-based vesting requirements, the number of shares that ultimately vest can vary from 0% to 200% of target depending on the level of achievement of performance criteria. Unvested shares related to restricted stock units with performance-based vesting conditions are reflected at 100% of their target vesting amount in the table above.

Service-based restricted stock units are expensed on a straight-line basis over the total requisite service period, net of forfeitures. Performance-based restricted stock units subject to graded vesting are expensed on an accelerated attribution basis, net of forfeitures. Market-based restricted stock units without graded vesting features are expensed on a straight-line basis over the requisite service period, net of forfeitures.

As of January 28, 2017, there was $24.7 million and $2.2 million of total unrecognized compensation cost, net of estimated forfeitures, related to service-based and market-based restricted stock units, respectively. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 16 months and 15 months for service-based and market-based restricted stock units, respectively.

Additional information pertaining to restricted stock units for Fiscal 2016, Fiscal 2015 and Fiscal 2014 follows:



(in thousands)	Fiscal 2016		Fiscal 2015		Fiscal 2014
Service-based restricted stock units:
Total grant date fair value of awards granted	$	29,047	$	23,101	$	33,075
Total grant date fair value of awards vested	20,314		23,608		17,078

Performance-based restricted stock units:
Total grant date fair value of awards granted	$	3,334	$	2,278	$	4,709
Total grant date fair value of awards vested	1,178		1,861		515

Market-based restricted stock units:
Total grant date fair value of awards granted	$	4,023	$	2,158	$	3,756
Total grant date fair value of awards vested	—		—		—

The weighted-average assumptions used for market-based restricted stock units in the Monte Carlo simulation during Fiscal 2016 and Fiscal 2015 were as follows:



	Fiscal 2016			Fiscal 2015
Grant date market price	$	28.06		$	22.46
Fair value	$	31.01		$	19.04
Assumptions:
Price volatility	45		%	45		%
Expected term (years)	2.7			2.8
Risk-free interest rate	1		%	0.9		%
Dividend yield	3		%	3.5		%
Average volatility of peer companies	34.5		%	34.0		%
Average correlation coefficient of peer companies	0.3415			0.3288