Aeropostale’s (NYSE:ARO) direct-to-consumer business, which mainly includes e-commerce, has been growing rapidly since its launch in 2005. The retailer’s emphasis on developing its e-commerce, f-commerce (e-commerce through Facebook) and m-commerce (or mobile commerce) has complemented this growth. While Aeropostale’s stores are confined to the U.S., its direct-to-consumer business allows it to cater to international buyers. In this analysis, we will discuss how this business has evolved, the strategies employed by Aeropostale and the significance of this channel.
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Aeropostale is a specialty retailer of casual apparel and accessories, mainly targeting young men and women in the age group 14 -17. Under its direct-to-consumer business, Aeropostale markets and sells its products through aeropostale.com and ps4u.com as well as through catalogs.  This business constitutes about 25% of the retailer’s value according to our estimates.
How Has Aeropostale’s Direct-To-Consumer Business Grown?
Aeropostale started its direct-to-consumer business in 2005, much later than some of its competitors such as Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO). However, the business has grown substantially over time and saw strong growth even during the recessionary period. In 2009, Aeropostale’s direct-to-consumer revenues increased by more than 60% due to the customer shift towards low-priced apparel products.  Lately, the growth has slowed down as competition from relatively more fashion-focused retailers has increased. Nevertheless, Aeropostale’s direct-to-consumer revenues have grown at an average annual rate of 30% over the past four years.  As a result, its direct-to-consumer business as a percentage of overall revenues has grown from 2.5% in 2007 to 10% in 2012.  Going forward, we expect this figure to exceed 15% by the end of our forecast period.
What Is Driving It?
Aeropostale has been able to establish a stable supply chain for its direct-to-consumer business. It utilizes the latest e-commerce technology for order management, product fulfillment and customer service. This has enabled the retailer to gradually reduce lead times and shipping & handling costs. Additionally, Aeropostale provides a large variety of designs and sizes over the Internet, which might be difficult to find in store. In September 2011, the retailer partnered with FifyOne to start international shipping.  This move allowed customers from more than 90 countries to purchase directly from Aeropostale.com in their local currency.
Along with this, Aeropostale has been focusing on m-commerce and f-commerce channels. It launched a mobile app for Android users and upgraded its m-commerce with HTML5, which is considered a useful technology for mobile websites.  The retailer recently added new features to its iPhone app such as a bar code scanner, outfit style guide & builder and a video section. Given the anticipated growth of mobile commerce in the U.S., these moves put Aeropostale in a favorable position from a long-term perspective. Along with healthy growth in online retail, Forrester expects sales via smartphones to account for 9% of total online retail sales in the U.S. by 2017, up from 3% in 2012. 
Leveraging the power of social networking, Aeropostale has launched a store on Facebook where customers can purchase products and provide feedback.  The retailer has seen considerable growth in the number of fans on Facebook (NASDAQ:FB), which has grown from 5 million in 2011 to 8.7 million currently.  
What Does This Mean For Aeropostale?
Although the direct-to-consumer business constitutes a very small part of Aeropostale’s revenues, it accounts for 25% of its value according to our estimates due to higher operating margins (around 24%) and expected growth. In addition, the global presence of Aeropostale’s e-commerce platform provides it an opportunity to increase brand awareness in international markets, which can allow retail store expansion at a later stage.
We currently forecast Aeropostale’s direct-to-consumer revenues to reach $470 million by the end of Trefis forecast period. However, if an improvement in Aeropostale’s product mix along with strategies mentioned above drive the segment’s revenues to $550 million, there can be 5% upside to our price estimate. Apart from revamping the online channel, the retailer needs to direct its focus on creating a balanced product mix of basic and fashion-focused products.
Our price estimate for Aeropostale stands at $15, which is about 10% above the market price.Notes:
- Aeropostale’s SEC filings [↩] [↩] [↩] [↩]
- Aeropostale Goes Global, FifyOne, Sept 21 2011 [↩]
- Aeropostale tries an Android app on for size, Internet Retailer, Aug 4 2011 [↩] [↩]
- M-Commerce sales via smartphones hit $8 billion in 2012, Internet Retailer, Jan 16 2013 [↩]
- Aeropostale Jumps Into The F-Commerce Game, Apparel, Aug 1 2011 [↩]
- Aeropostale’s Facebook Page [↩]