350
INTEGRATIVE CASE
2
Encore International
I
n the world of trendsetting fashion, instinct and marketing savvy are
prerequisites to success. Jordan Ellis had both. During 2003, his inter-
national casual-wear company, Encore, rocketed to $300 million in sales
after 10 years in business. His fashion line covered the young woman
from head to toe with hats, sweaters, dresses, blouses, skirts, pants,
sweatshirts, socks, and shoes. In Manhattan, there was an Encore shop
every five or six blocks, each featuring a different color. Some shops
showed the entire line in mauve, and others featured it in canary yellow.
Encore had made it. The company’s historical growth was so spec-
tacular that no one could have predicted it. However, securities analysts
speculated that Encore could not keep up the pace. They warned that
competition is fierce in the fashion industry and that the firm might
encounter little or no growth in the future. They estimated that stock-
holders also should expect no growth in future dividends.
Contrary to the conservative securities analysts, Jordan Ellis felt that
the company could maintain a constant annual growth rate in dividends
per share of 6% in the future, or possibly 8% for the next 2 years and 6%
thereafter. Ellis based his estimates on an established long-term expan-
sion plan into European and Latin American markets. Venturing into
these markets was expected to cause the risk of the firm, as measured by
beta, to increase immediately from 1.10 to 1.25.
In preparing the long-term financial plan, Encore’s chief financial
officer has assigned a junior financial analyst, Marc Scott, to evaluate the
firm’s current stock price. He has asked Marc to consider the conserva-
tive predictions of the securities analysts and the aggressive predictions
of the company founder, Jordan Ellis.
Marc has compiled these 2003 financial data to aid his analysis:Data item 2003 valueEarnings per share (EPS) $6.25
Price per share of common stock $40.00
Book value of common stock equity $60,000,000
Total common shares outstanding 2,500,000
Common stock dividend per share $4.00