(3)	Share-Based Compensation

We recognize expense for our share-based awards based on the fair value of the awards at grant date. Share-based awards consist of stock option grants and restricted shares of stock and the related cost is recognized over the requisite service period of the award.

Total share-based expense (a component of selling, general and administrative expenses) is summarized as follows:

	Thirteen Week Periods Ended					Twenty-Six Week Periods Ended
	August 3, 2014		August 4, 2013			August 3, 2014		August 4, 2013

Share-based compensation expense before income taxes	$	72		88		$	206		228
Income tax benefit		—		(33	)		—		(86	)

Share-based compensation expense net of income tax benefit	$	72		55		$	206		142

Effect on:
Basic earnings per share	$	0.02		0.02		$	0.06		0.04
Diluted earnings per share	$	0.02		0.02		$	0.06		0.04

Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

Equity Incentive Plan

In May 2003, the stockholders approved the 2003 ALCO Stores, Inc. Incentive Stock Option Plan and such plan was amended in 2010 to permit optionees to make a cashless, net exercise of their stock options (the 2003 ALCO Stores, Inc. Incentive Stock Option Plan, as amended is hereinafter referred to as the “2003 Plan”). There are 500,000 shares of Common Stock authorized for issuance upon exercise of options under the 2003 Plan. According to the terms of the 2003 Plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain events occur. In the case of a stockholder owning more than 10% of our outstanding voting stock, the exercise price of an incentive stock option may not be less than 110% of the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable on a tax deferred basis for the first time by an individual in any calendar year may not exceed $0.1 million. In the event that the foregoing results in a portion of an option exceeding the $0.1 million limitation, such portion of the option in excess of the limitation shall be treated as a nonqualified stock option. At August 3, 2014, we had 330,875 remaining shares authorized for future option grants. Upon exercise, we issue these shares from the unissued shares authorized. The 2003 Plan had a term of ten years and options could no longer be granted under the 2003 Plan after May 2013. Therefore, the Compensation Committee created a new stock option plan that was voted upon by our stockholders during the 2012 annual meeting to replace the 2003 Plan.

On June 27, 2012, our stockholders approved our 2012 Equity Incentive Plan (the "2012 Plan"), which is administered by the Compensation Committee of our Board of Directors. Under the 2012 Plan, we may grant up to 500,000 shares of our stock in the form of stock options, restricted stock, stock appreciation rights and other stock awards to our and our affiliate’s officers, key employees and consultants, other than our directors, who are not permitted to be participants in the 2012 Plan. The Compensation Committee has broad discretion to administer the 2012 Plan, interpret its provisions, and adopt policies for implementing purposes of the 2012 Plan. This discretion includes the power to select the persons who will receive awards, determine the form, terms and conditions of any such awards, and interpret, construe and apply such terms and conditions. According to the terms of the 2012 Plan, the per share exercise price of stock options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than ten years from the date of grant. The stock options, awards and rights granted under the Plan vest over a certain period of time, as determined by the Compensation Committee in its sole discretion, beginning from the grant date unless certain events occur as further provided under the terms of the Plan. In the case of a stockholder owning more than 10% of our outstanding voting stock, the exercise price of an incentive stock option may not be less than 110% of the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable on a tax deferred basis for the first time by an individual in any calendar year may not exceed $0.1 million. In the event that the foregoing results in a portion of an option exceeding the $0.1 million limitation, such portion of the option in excess of the limitation shall be treated as a non-qualified stock option. No more than 100,000 shares of our stock may be awarded in a single calendar year to any individual participating in the 2012 Plan. At August 3, 2014, we had 374,750 remaining shares authorized for future option grants. Upon exercise, we issue these shares from the unissued shares authorized. The 2012 Plan will expire on June 27, 2022.

Under our Non-Qualified Stock Option Plan for Non-Management Directors (the “Director Plan”), options may be granted to our directors who are not otherwise our officers or employees, not to exceed 200,000 shares. According to the terms of the Director Plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire five years from the date of grant. The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain events occur. All options under the Director Plan shall be non-qualified stock options. At August 3, 2014, we had 43,957 remaining shares to be issued under this plan. Upon exercise, we will issue these shares from the unissued shares authorized.

The fair value of each option grant is separately estimated. The fair value of each option is amortized into share-based compensation on a straight-line basis over the requisite service period as discussed above. We have estimated the fair value of all stock option awards as of the date of the grant by applying a modified Black-Scholes pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of share-based compensation, including expected stock price volatility. The assumptions used in determining the fair value of options granted and a summary of the methodology applied to develop each assumption are as follows:

	Fiscal 2014 Ended			Thirteen Week Periods Ended						Twenty-Six Week Periods Ended
	February 2, 2014			August 3, 2014			August 4, 2013			August 3, 2014			August 4, 2013
Stock options granted		129,500			89,500			129,500			89,500			129,500

Weighted average exercise price	$	9.97		$	8.05		$	9.97		$	8.05		$	9.97

Weighted average grant date fair value (per share)	$	4.69		$	4.29		$	4.69		$	4.29		$	4.69

Expected price volatility		47.11	%		51.90	%		47.11	%		51.90	%		47.11	%

Risk-free interest rate		0.60	%		1.31	%		0.60	%		1.31	%		0.60	%

Weighted average expected lives in years		7.4			7.4			7.4			7.4			7.4

Dividend yield		0.0	%		0.00	%		0.00	%		0.00	%		0.00	%

EXPECTED PRICE VOLATILITY — A measure of the amount by which a price has fluctuated or is expected to fluctuate. We use actual historical changes in the market value of its stock to calculate expected price volatility because management believes that this is the best indicator of future volatility. We calculate monthly market value changes from the date of grant over a past period to determine volatility. An increase in the expected volatility will increase share-based compensation.

RISK-FREE INTEREST RATE — The applicable U.S. Treasury rate for the date of the grant over the expected term. An increase in the risk-free interest rate will increase share-based compensation.

EXPECTED LIVES — The period of time over which the options granted are expected to remain outstanding and is based on management’s expectations in relation to the holders of the options. Options granted have a maximum term of ten years. An increase in the expected life will increase share-based compensation.

DIVIDEND YIELD — We have not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease share-based compensation.

As of August 3, 2014, total unrecognized share-based compensation expense related to non-vested stock options is $0.5 million with a weighted average expense recognition period of 3.1 years.