Share-Based Payments

Share-based payment expense before income taxes recognized during the twelve and forty weeks ended July 6, 2014 totaled approximately $15 million and $51 million, respectively, and approximately $13 million and $43 million, respectively, for the same periods of the prior fiscal year. Share-based payment expense was included in the following line items on the Consolidated Statements of Operations for the periods indicated (in millions):



	Twelve weeks ended						Forty weeks ended
	July 6, 2014			July 7, 2013			July 6, 2014			July 7, 2013
Cost of goods sold and occupancy costs	$	1		$	—		$	2		$	1
Direct store expenses	8			7			26			24
General and administrative expenses	6			6			23			18
Share-based payment expense before income taxes	15			13			51			43
Income tax benefit	(6		)	(5		)	(20		)	(16		)
Net share-based payment expense	$	9		$	8		$	31		$	27

At July 6, 2014 and September 29, 2013, approximately 37.4 million shares and 42.3 millionshares of the Company’s common stock, respectively, were available for future stock incentive grants.

Stock Options

On May 16, 2014, the Company issued its annual grant of stock options to team members and directors. The following table summarizes stock option activity during the forty weeks ended July 6, 2014 (in millions, except per share amounts and contractual lives in years):



	Number of options outstanding		Weighted average exercise price		Weighted average remaining contractual life	Aggregate intrinsic value
Outstanding options at September 29, 2013	19.2		$	36.90
Options granted	5.2		40.26
Options exercised	(1.1	)	24.73
Options expired	—		—
Options forfeited	(0.5	)	42.33
Outstanding options at July 6, 2014	22.8		$	38.19	5.02	$	114
Vested/expected to vest at July 6, 2014	21.6		$	37.92	4.70	$	113
Exercisable options at July 6, 2014	9.6		$	32.40	3.96	$	92

The weighted average grant date fair value of options granted during the forty weeks ended July 6, 2014 was $9.68. The aggregate intrinsic value of stock options at exercise, represented in the table above, for the forty weeks ended July 6, 2014 was approximately $31 million. At July 6, 2014 and September 29, 2013, there was approximately $124 million and $130 million of unrecognized share-based payment expense, respectively, related to unvested stock options, net of estimated forfeitures, related to approximately 12.0 million shares and 12.4 million shares, respectively. The Company anticipates this expense to be recognized over a weighted average period of 3.1 years.

A summary of stock options outstanding and exercisable at July 6, 2014 follows (share amounts in millions):



Range of Exercise Prices				Options Outstanding				Options Exercisable
From		To		Number of options outstanding	Weighted average exercise price		Weighted average remaining life (in years)	Number of options exercisable	Weighted average exercise price
$	9.45	$	18.49	1.0	$	9.60	1.88	1.0	$	9.52
20.42		28.50		2.6	20.43		3.50	2.3	20.42
31.25		37.91		8.2	34.77		5.43	2.5	31.25
40.81		46.28		6.3	44.29		4.85	2.8	44.26
51.25		59.15		4.7	51.93		6.02	1.0	51.86
Total				22.8	$	38.19	5.02	9.6	$	32.40

The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:



	2014		2013
Expected dividend yield	0.960	%	0.880	%
Risk-free interest rate	1.16	%	0.77	%
Expected volatility	30.61	%	31.25	%
Expected life, in years	3.94		3.96

Risk-free interest rate is based on the U.S. Treasury yield curve on the date of the grant for the time period equal to the expected term of the grant. Expected volatility is calculated using a ratio of implied volatility based on the Newton-Raphson method of bisection, and four or six year historical volatilities based on the expected life of each tranche of options. The Company determined the use of both implied volatility and historical volatility represents a more accurate calculation of option fair value. Expected life is calculated in two tranches based on weighted average percentage of unexpired options and exercise-after-vesting information over the last five or seven years. Unvested options are included in the term calculation using the “mid-point scenario” which assumes that unvested options will be exercised halfway between vest and expiration date. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience. In addition to the above valuation assumptions, the Company estimates an annual forfeiture rate for unvested options and adjusts fair value expense accordingly. The Company monitors actual forfeiture experience and adjusts the rate from time to time as necessary.

Restricted Stock

During the forty weeks ended July 6, 2014 and July 7, 2013, the Company awarded approximately 0.2 million shares and 0.1 million shares of restricted common stock, respectively, pursuant to the Whole Foods Market 2009 Stock Incentive Plan. Fair value of the restricted share issuances on grant date for the forty weeks ended July 6, 2014 and July 7, 2013 totaled approximately $11 million and $4 million, respectively.

Total share-based payment expense related to restricted shares for the twelve and forty weeks ended July 6, 2014 totaled approximately $1 million and $3 million, respectively, and is included in the “General and administrative expenses” line item on the Consolidated Statements of Operations. Share-based payment expense related to restricted shares was not material during fiscal year 2013. At July 6, 2014 and September 29, 2013, there was approximately $11 million and $3 million of unrecognized share-based payment expense, respectively, related to unvested restricted stock. The Company anticipates this expense to be recognized over a weighted average period of 4.2 years.