Stock-Based Compensation

Stock Option Plans

The Company’s 1999 Equity Incentive Plan (“1999 Plan”) provides for the grant of incentive stock options, non-statutory stock options, stock bonuses and restricted stock awards, which may be granted to employees, including officers, non-employee directors and consultants. Options granted under the 1999 Plan generally provide for 25% vesting on the first anniversary from the date of grant with the remainder vesting monthly over the subsequent three years and expire 10 years from the date of grant. Options granted under the 1999 Plan were generally granted at fair value on the date of the grant. As of May 19, 2004, the effective date of the Company’s initial public offering, no additional awards were granted under the 1999 Plan.

The Company’s 2004 Equity Incentive Plan (“2004 Plan”) provides for the grant of non-statutory stock options, restricted stock awards, stock appreciation rights, restricted stock units and other forms of equity compensation, which may be granted to employees, including officers, non-employee directors and consultants. As of December 30, 2012, the Company reserved 5,957,751 shares of common stock for future grants under the 2004 Plan, which amount will be increased annually on the first day of each fiscal year, up to and including 2014, by five percent of the number of shares of common stock outstanding on such date unless a lower number of shares is approved by the board of directors. Options granted under the 2004 Plan generally provide for 25% vesting on the first anniversary of the date of grant with the remainder vesting monthly over the subsequent three years, and generally expire 10 years from the date of grant.

The Company’s 2004 Non-Employee Directors’ Stock Option Plan (“Directors’ Plan”) provides for the automatic grant of non-statutory stock options to purchase shares of common stock to non-employee directors. In April 2012, the Directors' Plan was suspended; therefore, equity compensation that would have been granted under the Directors' Plan is now granted under the 2004 Plan. As of December 30, 2012, there are 438,026 shares of common stock reserve for future grants under the Directors’ Plan. As a result of the suspension, the amount for future grants will not increase annually. There were no options granted under the Directors’ Plan in the fiscal year ended December 30, 2012.

Employee Stock Purchase Plans

In April 2004, the Company adopted the 2004 Employee Stock Purchase Plan (the “Purchase Plan”). As of December 30, 2012, 1,000,000 shares of common stock are authorized to be sold under the Purchase Plan. Commencing on the first day of the fiscal year in which the Company first makes an offering under the Purchase Plan, this amount will be increased annually for 20 years. The increase in amount is the lesser of 320,000 shares or one and one half percent of the number of shares of common stock outstanding on each such date, unless a lower number of shares is approved by the board of directors. The Purchase Plan is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. As of December 30, 2012, no shares of common stock have been offered for sale under the Purchase Plan.

Option Grants to Non-Employees

The Company accounts for equity instruments issued to non-employees at their fair value on the measurement date.

Stock-Based Compensation Expense

The following weighted average assumptions were used for the valuation of stock options granted during the periods presented:



	Year Ended
	December 30, 2012			January 1, 2012			January 2, 2011
Expected term	4.3 years			4.0 years			4.0 years
Expected volatility	58.9		%	58.5		%	57.9		%
Expected dividend yield	0.0		%	0.0		%	0.0		%
Risk-free interest rate	0.7		%	0.9		%	1.2		%
Estimated weighted average fair value per option granted	$	15.45		$	20.54		$	21.60


•	Expected Term — This is the estimated period of time until exercise and is based primarily on historical experience for options with similar terms and conditions, giving consideration to future expectations. The Company also considers the expected terms of other companies that have similar contractual terms, expected stock volatility and employee demographics.


•	Expected Volatility — This is based on the Company’s historical stock price volatility.


•	Expected Dividend Yield — The Company has not paid dividends in the past and does not expect to pay dividends in the near future.


•	Risk-Free Interest Rate — This is the rate on nominal U.S. Government Treasury Bills with lives commensurate with the expected term of the options on the date of grant.

The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.

The following table represents total stock-based compensation expense recognized in the consolidated financial statements (in thousands):



	Year Ended
	December 30, 2012		January 1, 2012		January 2, 2011
Stock-based compensation expense in selling, general and administrative expenses	$	4,867	$	6,322	$	6,771
Stock-based compensation expense in cost of sales	100		92		91
Total stock-based compensation expense in the consolidated statements of operations	$	4,967	$	6,414	$	6,862
Total related tax benefit	$	1,753	$	2,194	$	2,354
Stock-based compensation capitalized	$	133	$	144	$	144

Stock-based compensation capitalized is included in property and equipment, net, in the consolidated balance sheets as a component of the cost capitalized for website development and the development of software for internal use. As of December 30, 2012, the Company had total unrecognized compensation costs related to unvested stock options of approximately $8.9 million, before income taxes. The Company expects to recognize this cost over a weighted average period of 2.89 years.

The following summarizes all stock option transactions from January 4, 2010 through December 30, 2012:



	Options		Weighted average exercise price		Weighted average remaining contractual term	Total intrinsic value
	(In thousands)				(In years)	(In thousands)
Balance, January 4, 2010	2,636		$	33.44
Granted	316		47.79
Exercised	(393	)	13.71
Canceled	(114	)	42.59
Balance, January 2, 2011	2,445		38.04
Granted	436		45.51
Exercised	(304	)	23.57
Canceled	(186	)	43.54
Balance, January 1, 2012	2,391		40.82
Granted	432		33.15
Exercised	(220	)	31.15
Canceled	(404	)	50.26
Balance, December 30, 2012	2,199		$	38.55	5.83	$	10,855
Vested and expected to vest at December 30, 2012	2,110		$	38.63	5.70	$	10,517
Exercisable at December 30, 2012	1,525		$	39.24	4.51	$	8,303

The aggregate intrinsic values in the table above are before applicable income taxes and represent the amounts recipients would have received if all options had been exercised on the last business day of the fiscal year ended December 30, 2012, based on the Company’s closing stock price.

The following table summarizes additional information about stock options outstanding at December 30, 2012:



	Outstanding				Exercisable
	Options	Weighted Average
		Remaining Contractual Life	Exercise Price
Range of Exercise Price		Remaining Contractual Life	Exercise Price		Options	Weighted Average Exercise Price
	(In thousands)	(In years)			(In thousands)
$8.75 — $30.09	564	4.78	$	26.18	447	$	25.58
$30.12 — $33.30	623	5.02	32.09		441	31.76
$33.40 — $46.44	553	7.32	38.65		286	40.35
$46.92 — $94.99	459	6.42	62.40		351	65.13
	2,199	5.83	38.55		1,525	39.24

The total intrinsic value of options exercised were approximately $1.6 million, $5.9 million and $15.4 million in the fiscal years ended December 30, 2012, January 1, 2012 and January 2, 2011, respectively. During the fiscal years ended December 30, 2012, January 1, 2012 and January 2, 2011, the total fair value of options vested was approximately $4.6 million, $6.4 million and $6.8 million, respectively.

During 2012, there were 6,369 restricted stock units granted, 3,183 restricted stock units vested, and no restricted stock units were cancelled. As of December 30, 2012, the Company has 3,186 restricted stock units that are vested or are expected to vest.