Share-Based Compensation

Share-Based Compensation Plans

The Company has four share-based compensation plans. The Guess?, Inc. 2004 Equity Incentive Plan (the “Plan”) provides that the Board of Directors may grant stock options and other equity awards to officers, key employees and certain consultants and advisors to the Company or any of its subsidiaries. Effective May 19, 2017, the Plan was amended to increase the authorized issuance of shares from 15,000,000 shares of common stock to 29,100,000 shares of common stock. In addition, the amendment provided that awards granted on or after May 1, 2017 (other than stock options or stock appreciation rights) would be counted against the number of shares available to be issued under the Plan as 3.54 shares for every one share actually issued. The amendment also extended the term through May 19, 2027 and extended the Company’s ability to grant certain performance-based awards under the Plan through the first annual meeting of the Company’s shareholders in calendar 2022. As of February 3, 2018 and January 28, 2017, there were 15,350,428 and 4,092,241 shares available for grant under the Plan, respectively. Stock options granted under the Plan have ten-year terms and typically vest and become fully exercisable in increments of one-fourth of the shares granted on each anniversary from the date of grant. Stock awards/units granted under the Plan typically vest in increments of one-fourth of the shares granted on each anniversary from the date of grant. The three most recent annual grants for stock options and other equity awards had initial vesting periods of nine months followed by three annual vesting periods.

The Guess?, Inc. Employee Stock Purchase Plan (“ESPP”) allows qualified employees to participate in the purchase of designated shares of the Company’s common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period.

The Guess?, Inc. 2006 Non-Employee Directors’ Stock Grant and Stock Option Plan (the “Director Plan”) provides for the grant of equity awards to non-employee directors. Effective May 20, 2016, the Director Plan was amended to extend the term through June 30, 2026, reduce the authorized issuance of shares from 2,000,000 shares of common stock to 1,850,000 shares of common stock and allow more flexibility to structure compensation arrangements for the Company’s non-employee directors. All other remaining provisions under the Director Plan remained in full force and effect. As of February 3, 2018 and January 28, 2017, there were 495,489 and 582,639 shares available for grant under this plan, respectively.

In addition, the Guess?, Inc. 1996 Equity Incentive Plan, under which equity grants have not been permitted since the approval of the Plan in 2004, continues to govern outstanding awards previously made thereunder.

Performance-Based Awards

The Company has granted certain nonvested units that require certain minimum performance targets to be achieved in order for these awards to vest. Vesting is also subject to continued service requirements through the vesting date. If the minimum performance targets are not forecasted to be achieved, no expense is recognized during the period.

The Company has granted certain nonvested stock units subject to performance-based vesting conditions to select executive officers. Each award of nonvested stock units generally has an initial vesting period from the date of the grant through either (i) the end of the first fiscal year or (ii) the first anniversary of the date of grant, followed by annual vesting periods which may range from two-to-three years. The nonvested stock units are subject to the achievement of certain performance-based vesting conditions.

The Company has also granted a target number of nonvested stock units to select key management, including certain executive officers. The number of shares that may ultimately vest with respect to each award may range from 0% up to 200% of the target number of shares, subject to the achievement of certain performance-based vesting conditions. Any shares that are ultimately issued are scheduled to vest at the end of the third fiscal year following the grant date.

Market-Based Awards

The Company has granted certain nonvested stock units which are subject to market-based performance targets in order for these units to vest. Vesting is also subject to continued service requirements through the vesting date. The grant date fair value for such nonvested stock units was estimated using a Monte Carlo simulation that incorporates option-pricing inputs covering the period from the grant date through the end of the performance period. Compensation expense for such nonvested stock units is recognized on a straight-line basis over the vesting period, regardless of whether the market condition is satisfied.

The Company has granted certain nonvested stock units subject to market-based vesting conditions to select executive officers. The number of shares that may ultimately vest will equal 0% to 150% of the target number of shares, subject to the performance of the Company’s total stockholder return (“TSR”) relative to the TSR of a select group of peer companies over a three-year period.

Contingently Returnable Restricted Stock Awards

On July 7, 2015, the Company granted Victor Herrero, the Company’s Chief Executive Officer, 150,000 restricted stock units in addition to certain other stock options and nonvested stock units in connection with an employment agreement entered into between the Company and Mr. Herrero (the “Herrero Employment Agreement”). These restricted stock units vested immediately but were considered contingently returnable as a result of a one-year implied service condition set forth in the Herrero Employment Agreement. This service condition was met during the year ended January 28, 2017. Compensation expense for these restricted stock units was recognized on a straight-line basis over the implied service period.

Share-Based Compensation Expense

Compensation expense for nonvested stock options and stock awards/units that are not subject to performance-based vesting conditions is recognized on a straight-line basis over the vesting period. Compensation expense for performance-based awards that vest in increments is recognized based on an accelerated attribution method. During fiscal 2018, the Company adopted authoritative guidance which eliminates the requirement to estimate forfeitures, but rather provides for an election that would allow entities to account for forfeitures as they occur. The Company adopted this election using the modified retrospective method and recorded a cumulative adjustment to reduce retained earnings by approximately $0.3 million as of the beginning of the period of adoption.

The following table summarizes the share-based compensation expense recognized under all of the Company’s stock plans during fiscal 2018, fiscal 2017 and fiscal 2016 (in thousands):



	Year Ended		Year Ended		Year Ended
	Feb 3, 2018		Jan 28, 2017		Jan 30, 2016
Stock options	$	2,345	$	2,219	$	2,113
Stock awards/units	16,347		14,544		16,604
ESPP	160		145		163
Total share-based compensation expense	$	18,852	$	16,908	$	18,880

Stock options

The following table summarizes the stock option activity under all of the Company’s stock plans during fiscal 2018:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value ($000’s)
Options outstanding at January 28, 2017	2,857,012		$	24.30
Granted	1,283,175		11.22
Exercised	(123,775	)	11.22
Forfeited	(88,625	)	25.39
Expired	(15,375	)	41.14
Options outstanding at February 3, 2018	3,912,412		$	20.33	4.79	$	3,930
Exercisable at February 3, 2018	2,232,456		$	24.56	6.52	$	668
Options exercisable and expected to vest at February 3, 2018	3,912,412		$	20.33	4.79	$	3,930

The fair value of each stock option was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants during fiscal 2018, fiscal 2017 and fiscal 2016:



	Year Ended		Year Ended		Year Ended
Valuation Assumptions	Feb 3, 2018		Jan 28, 2017		Jan 30, 2016
Risk-free interest rate	1.5	%	1.0	%	1.0	%
Expected stock price volatility	37.1	%	35.4	%	36.7	%
Expected dividend yield	8.0	%	4.8	%	4.7	%
Expected life of stock options (in years)	4.4		4.2		3.8

The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected stock price volatility is determined based on an average of both historical volatility and implied volatility. Implied volatility is derived from exchange traded options on the Company’s common stock. The expected dividend yield is based on the Company’s history and expectations of dividend payouts. The expected life is determined based on historical trends.

The weighted average grant date fair value of options granted was $1.57, $3.53 and $3.75 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The total intrinsic value of stock options exercised was $0.7 million during fiscal 2018 and minimal during fiscal 2017. During fiscal 2016, the total intrinsic value of stock options exercised was $0.1 million. The intrinsic value of stock options is defined as the difference between the Company’s stock price on the exercise date and the grant date exercise price. The total cash received from option exercises was $1.4 million, $0.2 million and $0.3 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

The compensation expense included in SG&A expense recognized was $2.3 million before the recognized income tax benefit of $0.8 million during fiscal 2018. As of February 3, 2018, there was approximately $3.7 million of unrecognized compensation cost related to nonvested stock options. This cost is expected to be recognized over a weighted average period of 1.5 years. The excess tax shortfall included in cash flows from operating activities related to stock option activity was minimal for fiscal 2018.

Stock awards/units

The following table summarizes the nonvested stock awards/units activity under all of the Company’s stock plans during fiscal 2018:



	Number of Awards/Units		Weighted Average Grant Date Fair Value
Nonvested at January 28, 2017	1,686,204		$	18.80
Granted	1,969,619		11.41
Vested	(1,052,796	)	17.52
Forfeited	(138,461	)	14.94
Nonvested at February 3, 2018	2,464,566		$	13.66

The following table summarizes the activity for nonvested performance-based units and nonvested market-based units included in the table above during fiscal 2018:



	Performance-Based Units				Market-Based Units
	Number of Units		Weighted Average Grant Date Fair Value		Number of Units		Weighted Average Grant Date Fair Value
Nonvested at January 28, 2017	787,849		$	19.17	323,825		$	16.63
Granted	818,416		11.17		309,118		12.03
Vested	(290,645	)	19.85		(244,466	)	17.72
Forfeited	(14,699	)	16.60		—		—
Nonvested at February 3, 2018	1,300,921		$	14.01	388,477		$	12.28

The fair value of each market-based nonvested stock unit was estimated on the grant date using the Monte Carlo simulation with the following assumptions used for the grants during fiscal 2018, fiscal 2017 and fiscal 2016:



	Year Ended		Year Ended		Year Ended
Valuation Assumptions	Feb 3, 2018		Jan 28, 2017		Jan 30, 2016
Risk-free interest rate	1.4	%	0.9	%	0.9	%
Expected stock price volatility	39.7	%	36.2	%	38.6	%
Expected dividend yield	—	%	—	%	—	%
Expected life of market-based awards (in years)	2.8		2.8		2.8

The weighted average grant date fair value for the total nonvested stock awards/units granted was $11.41, $18.01 and $18.79 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The total fair value at grant date of previously nonvested stock awards/units that were vested during fiscal 2018, fiscal 2017 and fiscal 2016 was $18.4 million, $14.7 million and $14.0 million, respectively. During fiscal 2018, fiscal 2017 and fiscal 2016, the total intrinsic value of nonvested stock awards/units that vested was $12.6 million, $9.4 million and $11.0 million, respectively. The total intrinsic value of nonvested stock awards/units outstanding and unvested as of February 3, 2018 was $36.0 million.

The compensation expense included in SG&A expense recognized during fiscal 2018 was $16.3 million before the recognized income tax benefit of $5.6 million. As of February 3, 2018, there was approximately $26.9 million of total unrecognized compensation cost related to nonvested stock awards/units. This cost is expected to be recognized over a weighted average period of 1.6 years. The excess tax shortfall of $1.3 million related to stock award/unit activity was included in cash flows from operating activities for fiscal 2018.

ESPP

The Company’s ESPP allows qualified employees (as defined) to participate in the purchase of designated shares of the Company’s common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period. The ESPP requires participants to hold any shares purchased under the ESPP for a minimum period of six months after purchase. In addition, all Company employees are subject to the terms of the Company’s securities trading policy which generally prohibits the purchase or sale of any Company securities during the two weeks before the end of each fiscal quarter through two days after the public announcement by the Company of its earnings for that period. The Company has 4,000,000 shares of common stock registered under the ESPP. The Company’s ESPP will remain in effect through March 11, 2022.

During fiscal 2018, fiscal 2017 and fiscal 2016, 54,300 shares, 44,486 shares and 40,846 shares of the Company’s common stock were issued pursuant to the ESPP at an average price of $10.45, $12.56 and $16.17 per share, respectively.

The fair value of stock compensation expense associated with the Company’s ESPP was estimated on the date of grant using the Black-Scholes option-pricing valuation model with the following weighted average assumptions used for grants during fiscal 2018, fiscal 2017 and fiscal 2016.



	Year Ended		Year Ended		Year Ended
Valuation Assumptions	Feb 3, 2018		Jan 28, 2017		Jan 30, 2016
Risk-free interest rate	1.0	%	0.3	%	0.1	%
Expected stock price volatility	45.8	%	41.1	%	34.9	%
Expected dividend yield	7.6	%	6.2	%	4.7	%
Expected life of ESPP options (in months)	3		3		3

The weighted average grant date fair value of ESPP options granted during fiscal 2018, fiscal 2017 and fiscal 2016 was $2.85, $3.32 and $4.06, respectively.