Share-based Compensation

12 Months Ended

Jan. 28, 2023

Share-Based Payment Arrangement, Noncash Expense [Abstract]

Plan Summary

Prior to the Separation, certain Company employees participated in the stock option and performance incentive plan of the Former Parent (“Former Parent's Plan”). In connection with the Separation, the Company's Board of Directors approved the 2021 Stock Option and Performance Incentive Plan (“2021 Plan”). The 2021 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted shares, restricted share units, performance share units, unrestricted shares, converted awards, replacement awards and substitute awards.

Under the Company’s 2021 Plan, 11 million options, restricted and unrestricted shares have been authorized to be granted to employees and directors, in addition to the converted awards from the Separation. There were 9 million options and shares available for grant as of January 28, 2023.

Conversion at Separation

Under the terms of the Employee Matters Agreement between the Company and the Former Parent, in connection with the Separation, restricted stock and stock option equity awards granted to Company employees under the Former Parent's Plan were converted to awards representing approximately 6.0 million shares of the Company's common stock (the “Converted Awards”) under the Company's 2021 Plan. Adjustments to the underlying shares and terms of outstanding restricted stock and stock options were made to preserve the intrinsic value of the awards immediately before the Separation. The adjustment of the underlying shares and exercise prices, as applicable, was determined using a conversion ratio of 1.665 based on the relative values of the Former Parent's pre-Separation stock price and the Company's post-Separation stock price. The outstanding awards continue to vest over their original vesting periods. The Company did not recognize any incremental compensation cost related to the adjustment of outstanding awards.

Income Statement Impact

For the period prior to the Separation, the following disclosures of share-based compensation expense recognized by the Company are based on grants related directly to Company employees, and exclude amounts related to the allocation of the Former Parent's corporate and shared employee share-based compensation expenses.

The following table provides share-based compensation expense included in the Consolidated and Combined Statements of Income (Loss) for 2022, 2021 and 2020:


	2022		2021		2020
	(in millions)
Costs of Goods Sold, Buying and Occupancy	$	18	$	12	$	9
General, Administrative and Store Operating Expenses	30		21		16
Total Share-based Compensation Expense	$	48	$	33	$	25

The tax benefit associated with recognized share-based compensation expense was $9 million for 2022, $6 million for 2021 and $6 million for 2020.

Restricted Stock

Restricted stock, including restricted stock units and performance share units, generally vests (the restrictions lapse) at the end of a three-year period or on a graded basis over a three-year period. The fair value of restricted stock awards is generally based on the market value of an unrestricted share on the grant date adjusted for anticipated dividend yields, if applicable.

During 2022, the Company granted performance share unit awards that include a specified market condition which can adjust the number of shares that vest under the award. The market condition compares total shareholder return to that of a designated peer group over the performance period. The performance share unit awards were valued using a Monte Carlo simulation model, which requires certain assumptions, including a risk-free interest rate of 2.1% and an expected volatility of 46.3%. The risk-free interest rate assumption is based on U.S. treasury constant maturity yields on the grant date with a term corresponding to the length of the remaining performance period. Due to the Company's limited trading history, the expected volatility assumption is based on the average historical volatility of the designated peer group. There was no dividend yield utilized in the Monte Carlo simulation model as the Company has not paid any cash dividends since the Separation.

As discussed above, restricted stock awards granted to Company employees under the Former Parent's Plan prior to the Separation were converted to shares of the Company's common stock in connection with the Separation. The Converted Awards have the same terms and conditions as the original awards, including the original vesting periods.

The following table provides the Company’s restricted stock activity for the fiscal year ended January 28, 2023:


	Number of Shares	Weighted-Average Grant Date Fair Value
	(in thousands)
Unvested as of January 29, 2022	4,132	$	23.04
Granted	1,872	47.63
Vested	(2,312)	15.76
Cancelled	(426)	40.71
Unvested as of January 28, 2023	3,266	$	39.98

The weighted-average estimated fair value of restricted stock awards granted was $47.63 per share for 2022 and $56.63 per share for 2021 after the Separation.

The Company’s total intrinsic value of restricted stock awards that vested was $118 million for 2022 and $11 million for 2021 after the Separation. The Company’s total fair value at grant date of restricted stock awards that vested was $36 million for 2022 and $3 million for 2021 after the Separation. The tax benefit realized from tax deductions associated with restricted stock awards that vested was $27 million for 2022 and $2 million for 2021 after the Separation.

As of January 28, 2023, there was $50 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock. That cost is expected to be recognized over a weighted-average period of 1.6 years.

Stock Options

In connection with the Separation, stock options granted to Company employees under the Former Parent's Plan were converted to awards representing approximately 1.7 million shares of the Company's common stock. No stock options have been granted by the Company subsequent to the Separation.

Stock options granted under the Former Parent's Plan have a maximum term of 10 years and generally vest ratably over three to five years. The fair value of stock options was determined using the Black-Scholes option-pricing model. Stock options were granted with an exercise price equal to the fair market value of the stock on the date of grant. The determination of the fair value of the options was affected by the Former Parent's stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards and projected employee stock option exercise behaviors. Intrinsic value for stock options is the difference between the current market value of the Company’s stock and the option strike price. The Company's stock option activity, including stock options granted, exercised or cancelled, for Company employees for the fiscal year ended January 28, 2023 was not significant.

As of January 28, 2023, there was $1 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 1.1 years. As of January 28, 2023, there were 1.3 million outstanding stock options, the majority of which were fully vested, with a total intrinsic value of $11 million.