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Stock-Based Compensation

12 Months Ended

Jan. 29, 2022

NOTE 18—STOCK-BASED COMPENSATION

We recorded stock-based compensation expense of $48 million, $146 million and $22 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively, which is included in selling, general and administrative expenses on the consolidated statements of income. No stock-based compensation cost has been capitalized in the accompanying consolidated financial statements.

2012 Stock Incentive Plan and 2012 Stock Option Plan

The Restoration Hardware 2012 Stock Incentive Plan (the “Stock Incentive Plan”) was adopted on November 1, 2012. The Stock Incentive Plan provides for the grant of incentive stock options to our employees, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards and any combination thereof to our employees, directors and consultants and our parent and subsidiary corporations’ employees, directors and consultants.

The Restoration Hardware 2012 Stock Option Plan (the “Option Plan”) was adopted on November 1, 2012 and on such date 6,829,041 fully vested options were granted under this plan to certain of our employees and advisors. Aside from these options granted on November 1, 2012, no other awards will be granted under the Option Plan.

As of January 30, 2021, there were a total of 427,062 shares issuable under the Stock Incentive Plan. On February 1, 2021, an additional 419,908 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision, increasing the total number of shares issuable under the Stock Incentive Plan to 846,970. Awards under the plans reduce the number of shares available for future issuance. Cancellations and forfeitures of awards previously granted under the Stock Incentive Plan increase the number of shares available for future issuance. Cancellations and forfeitures of awards previously granted under the Option Plan are immediately retired and are no longer available for future issuance.

The number of shares available for future issuance under the Stock Incentive Plan as of January 29, 2022 was 1,185,322. Shares issued as a result of award exercises under the Stock Incentive Plan and Option Plan will be funded with the issuance of new shares. On January 31, 2022 an additional 430,139 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision.

2012 Stock Incentive Plan and 2012 Stock Option Plan—Stock Options

A summary of stock option activity under the Stock Incentive Plan and the Option Plan is as follows:


		WEIGHTED-AVERAGE
	OPTIONS	EXERCISE PRICE
Outstanding—January 30, 2021	8,477,506	$	102.44
Granted	150,450		618.79
Exercised	(466,974)		68.63
Cancelled	(460,875)		149.75
Outstanding—January 29, 2022	7,700,107	$	111.76

The fair value of stock options issued was estimated on the date of grant using the following assumptions:


	YEAR ENDED
	JANUARY 29,		JANUARY 30,		FEBRUARY 1,
	2022		2021		2020
Expected volatility	64.2	%	58.9	%	55.7	%
Expected life (years)	7.3		8.3		7.1
Risk-free interest rate	1.4	%	0.6	%	2.3	%
Dividend yield	—		—		—

A summary of additional information about stock options is as follows:


	YEAR ENDED
	JANUARY 29,		JANUARY 30,		FEBRUARY 1,
	2022		2021		2020
Weighted-average fair value per share of stock options granted	$	392.65	$	168.90	$	63.35
Aggregate intrinsic value of stock options exercised (in thousands)		280,060		75,011		82,718
Fair value of stock options vested (in thousands)		59,074		12,429		11,816

Information about stock options outstanding, vested or expected to vest, and exercisable as of January 29, 2022 is as follows:


	OPTIONS OUTSTANDING				OPTIONS EXERCISABLE
		WEIGHTED-
		AVERAGE	WEIGHTED-			WEIGHTED-
		REMAINING	AVERAGE			AVERAGE
	NUMBER OF	CONTRACTUAL	EXERCISE		NUMBER OF	EXERCISE
RANGE OF EXERCISE PRICES	OPTIONS	LIFE (IN YEARS)	PRICE		OPTIONS	PRICE
$25.39 — $45.82	489,583	3.07	$	36.24	485,203	$	36.21
$46.50 — $46.50	2,876,826	0.75		46.50	2,876,826		46.50
$50.00 — $75.43	2,262,747	3.16		62.54	2,260,367		62.54
$87.31 — $385.30	1,923,901	7.93		248.75	931,071		323.89
$389.34 — $716.75	147,050	9.31		604.75	1,770		469.87
Total	7,700,107		$	111.76	6,555,237	$	90.78
Vested or expected to vest	7,424,028		$	106.68

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of January 29, 2022 was $2.2 billion, $2.1 billion and $2.0 billion, respectively. Stock options exercisable as of January 29, 2022 had a weighted-average remaining contractual life of 2.77 years.

We recorded stock-based compensation expense related to stock options of $45 million, $140 million and $14 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. The fiscal 2021 and fiscal 2020 expense includes $24 million and $117 million, respectively, associated with the option grant to Mr. Friedman in October 2020 (refer to Chairman and Chief Executive Officer Option Grant below). As of January 29, 2022, the total unrecognized compensation expense related to unvested options was $102 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 4.82 years. In addition, as of January 29, 2022, the total unrecognized compensation expense related to the fully vested option grant made to Mr. Friedman in October 2020 was $33 million, which will be recognized on an accelerated basis through May 2025 (refer to Chairman and Chief Executive Officer Option Grant below).

Chairman and Chief Executive Officer Option Grant

On October 18, 2020, our Board of Directors granted Mr. Friedman an option to purchase 700,000 shares of our common stock with an exercise price equal to $385.30 per share under the 2012 Stock Incentive Plan.

The option contains selling restrictions on the underlying shares that lapse upon the achievement of both time-based service requirements and stock price performance-based metrics as described further below. The option is fully vested on the date of grant but the shares underlying the option remain subject to transfer restrictions to the extent the performance-based and time-based requirements have not been met. The option will result in aggregate non-cash stock compensation expense of $174 million, of which $24 million and $117 million was recognized in fiscal 2021 and fiscal 2020, respectively, (which is included in the stock-based compensation expense amounts noted above).

Time-Based Restrictions

The time-based restrictions are measured over a four-year performance year period which will begin in May 2021, on the anniversary of the option granted to Mr. Friedman in 2017. The time-based restrictions will lapse at the end of each of the successive anniversary dates from May 2022 through May 2025 at a rate of 175,000 shares per year if (i) Mr. Friedman remains in service with us at the end of such year with the authority, duties, or responsibilities of a chief executive officer at such date and (ii) the stock price performance-based metrics have been achieved in such year as described further below.

Performance-Based Restrictions

The stock price performance-based restrictions of the option are measured annually over the performance year period and may lapse as to only one-quarter of the option in each of the first four performance years, with the first performance year beginning in May 2021. The stock price performance-based metrics for the option are set at $500 per share, $650 per share and $800 per share. With respect to any given performance year, if the “twenty day average trading price” our common stock exceeds $500 per share, $650 per share, or $800 per share during such performance year, then the selling restrictions will lapse as to 58,333 shares, 58,333 share and 58,334 shares, respectively, on the last day of such performance year, if Mr. Friedman remains in service with us at such date.

Any selling restrictions that have not lapsed in any performance year during the first four performance years may be achieved in a successive performance year through the end of the eighth performance year which ends in May 2029, provided Mr. Friedman continues to satisfy the service requirement through the date the performance target is achieved. Any selling restrictions that have not lapsed by the end of the eighth performance year will thereafter only lapse in May 2041, the 20th anniversary of the beginning of the first performance year.

2012 Stock Incentive Plan—Restricted Stock Awards

We grant restricted stock awards, which include restricted stock and restricted stock units, to our employees and members of our Board of Directors. A summary of restricted stock award activity is as follows:


		WEIGHTED-
		AVERAGE
		GRANT DATE FAIR		INTRINSIC
	AWARDS	VALUE		VALUE
Outstanding—January 30, 2021	92,250	$	61.04
Granted	12,010		582.79
Released	(76,010)		56.00
Cancelled	(8,500)		55.96
Outstanding—January 29, 2022	19,750	$	399.89	$	7,740,420

A summary of additional information about restricted stock awards is as follows:


	YEAR ENDED
	JANUARY 29,		JANUARY 30,		FEBRUARY 1,
	2022		2021		2020
Weighted-average fair value per share of awards granted	$	582.79	$	371.36	$	129.21
Grant date fair value of awards released (in thousands)		4,257		6,710		10,522

We recorded stock-based compensation expense related to restricted stock awards of $3.0 million, $4.9 million and $7.3 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. As of January 29, 2022, the total unrecognized compensation expense related to unvested restricted stock awards was $5.3 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.07 years.