STOCK-BASED COMPENSATION

9 Months Ended

Nov. 03, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK-BASED COMPENSATION

NOTE 4: STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation plans in accordance with FASB ASC 718 “Compensation – Stock Compensation.” Under FASB ASC 718, stock-based compensation expense is based on awards ultimately expected to vest, and therefore has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant based on the Company’s historical forfeiture experience and will be revised in subsequent periods if actual forfeitures differ from those estimates.

FASB ASC 718 also requires the benefits of income tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required prior to FASB ASC 718. The following information includes separate disclosures for discontinued operations. These disclosures relate solely to our Entrust discontinued operation. There are no stock-based compensation disclosures related to the Retail Pharmacy discontinued operations. A summary of the Company’s stock-based compensation (a component of selling, general and administrative expenses) and related income tax benefit is as follows:

	Thirteen Weeks Ended				Thirty Nine Weeks Ended
(in thousands)	November 3, 2018		October 28, 2017		November 3, 2018		October 28, 2017
Continuing Operations
Stock option expense	$	215	$	307	$	709	$	1,152
Restricted stock expense		226		1,059		1,976		3,026
ESPP expense		—		244		—		428
Total stock-based compensation	$	441	$	1,610	$	2,685	$	4,606
Income tax benefit on stock-based compensation	$	11	$	414	$	34	$	1,192

	Thirteen Weeks Ended				Thirty Nine Weeks Ended
(in thousands)	November 3, 2018		October 28, 2017		November 3, 2018		October 28, 2017
Discontinued Operations
Stock option expense	$	13	$	50	$	48	$	174
Restricted stock expense		9		15		34		63
Total stock-based compensation	$	22	$	65	$	82	$	237
Income tax benefit on stock-based compensation	$	—	$	—	$	4	$	14

The fair value of each option granted during the thirteen and thirty-nine week periods ended November 3, 2018 and October 28, 2017 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Thirteen Weeks Ended						Thirty Nine Weeks Ended
Continuing Operations	November 3, 2018			October 28, 2017			November 3, 2018			October 28, 2017
Stock Options
Expected volatility		0.0	%		46.1	%		0.0	%		41.7	%
Risk-free interest rate		0.0	%		1.9	%		0.0	%		2.1	%
Expected option life (in years)		0			5.84			0			5.84
Expected dividend yield		0.00	%		1.98	%		0.00	%		1.87	%
Weighted average fair value at grant date	$	—		$	2.44		$	—		$	4.11

	Thirteen Weeks Ended						Thirty Nine Weeks Ended
Discontinued Operations	November 3, 2018			October 28, 2017			November 3, 2018			October 28, 2017
Stock Options
Expected volatility		0.0	%		0.0	%		0.0	%		43.1	%
Risk-free interest rate		0.0	%		0.0	%		0.0	%		2.2	%
Expected option life (in years)		0			0			0			5.84
Expected dividend yield		0.00	%		0.00	%		0.00	%		1.85	%
Weighted average fair value at grant date	$	—		$	—		$	—		$	4.89

	Thirteen Weeks Ended						Thirty Nine Weeks Ended
	November 3, 2018			October 28, 2017			November 3, 2018			October 28, 2017
Employee Stock Purchase Plan
Expected volatility		0.0	%		86.1	%		0.0	%		82.2	%
Risk-free interest rate		0.0	%		1.0	%		0.0	%		1.0	%
Expected option life (in years)		0.00			0.75			0.00			0.50
Expected dividend yield		0.00	%		1.24	%		0.00	%		0.81	%
Weighted average fair value at grant date	$	—		$	7.95		$	—		$	6.86

The following is a summary of the methodology applied to develop each assumption:

Expected Volatility - This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of our stock to calculate expected price volatility because management believes that this is the best indicator of future volatility. The Company calculates weekly market value changes from the date of grant over a past period representative of the expected life of the options to determine volatility. An increase in the expected volatility may increase compensation expense.

Risk-free Interest Rate - This is the yield of a U.S. Treasury zero-coupon bond issue effective at the grant date with a remaining term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Expected Lives - This is the period of time over which the options granted are expected to remain outstanding and is based on historical experience. Options granted have a maximum term of seven to ten years. An increase in the expected life will increase compensation expense.

Dividend Yield – This is based on the historical yield for a period equivalent to the expected life of the option. An increase in the dividend yield will decrease compensation expense.

Employee Stock Purchase Plan

The 2004 Employee Stock Purchase Plan (“ESPP”) (the “2004 Plan”), which was approved by Fred’s shareholders, permits eligible employees to purchase shares of our common stock through payroll deductions at the lower of 85% of the fair market value of the stock at the time of grant, or 85% of the fair market value at the time of exercise. During the fourth quarter of 2017, management and the Board of Directors suspended purchases through the ESPP effective December 31, 2017. The ESPP suspension resulted in zero shares issued during the thirty-nine weeks ended November 3, 2018. There are 1,410,928 shares approved to be issued under the 2004 Plan and as of November 3, 2018, there were 595,681 shares available.

Stock Options

The following table summarizes stock option activity during the thirty-nine weeks ended November 3, 2018: 

Continuing Operations	Options			Weighted- Average Exercise Price		Weighted-Average Contractual Life (years)		Aggregate Intrinsic Value (000s)
Outstanding at February 3, 2018		1,171,825		$	13.12		5.1	$	—
Granted		—			—
Cancelled		(537,254	)		12.29
Exercised		—			—
Outstanding at November 3, 2018		634,571		$	13.83		4.4	$	—
Exercisable at November 3, 2018		442,605		$	14.60		4.2		—

Discontinued Operations	Options			Weighted- Average Exercise Price		Weighted-Average Contractual Life (years)		Aggregate Intrinsic Value (000s)
Outstanding at February 3, 2018		167,375		$	14.23		5.4	$	—
Granted		—			—
Cancelled		(158,984	)		14.17
Exercised		—			—
Outstanding at November 3, 2018		8,391		$	15.44		4.5	$	—
Exercisable at November 3, 2018		3,356		$	15.44		4.5	$	—

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Fred’s closing stock price on the last trading day of the period ended November 3, 2018 and the exercise price of the option multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that date. As of November 3, 2018, total unrecognized stock-based compensation expense net of estimated forfeitures related to non-vested stock options for continuing operations was approximately $1.0 million, which is expected to be recognized over a weighted average period of approximately 3.0 years. As of November 3, 2018, there was no unrecognized stock-based compensation expense, net of estimated forfeitures related to non-vested stock options for discontinued operations. The total fair value of options vested during the thirty-nine weeks ended November 3, 2018 for continuing operations was $146.3 thousand. The total fair value of options vested during the thirty-nine weeks ended November 3, 2018 for discontinued operations was $10.3 thousand. 

Restricted Stock

The following table summarizes restricted stock activity during the thirty-nine weeks ended November 3, 2018: 

Continuing Operations	Number of Shares			Weighted-Average Grant Date Fair Value
Non-vested Restricted Stock at February 3, 2018		653,895		$	10.14
Granted		649,233			2.23
Forfeited / Cancelled		(109,512	)		10.68
Vested		(413,630	)		7.73
Non-vested Restricted Stock at November 3, 2018		779,986		$	4.77

Discontinued Operations	Number of Shares			Weighted-Average Grant Date Fair Value
Non-vested Restricted Stock at February 3, 2018		11,194		$	15.35
Granted		—			—
Forfeited / Cancelled		(8,862	)		14.95
Vested		(2,332	)		15.44
Non-vested Restricted Stock at November 3, 2018		—		$	—

For continuing operations, the aggregate pre-tax intrinsic value of restricted stock outstanding as of November 3, 2018 is $2.3 million with a weighted average remaining contractual life of 8.6 years. The unrecognized compensation expense net of estimated forfeitures, related to the outstanding stock is approximately $2.2 million, which is expected to be recognized over a weighted average period of approximately 2.9 years. The total fair value of restricted stock awards that vested during the thirty-nine weeks ended November 3, 2018 was $3.2 million.

For discontinued operations, there was no aggregate pre-tax intrinsic value of restricted stock outstanding as of November 3, 2018, no weighted average remaining contractual life, and no unrecognized compensation expense related to the outstanding stock The total fair value of restricted stock awards related to discontinued operations that vested during the thirty-nine weeks ended November 3, 2018 was $0.04 million.