Ever since its launch in 2005, Aeropostale’s (NYSE:ARO) direct-to-consumer business, which mainly includes e-commerce, has been growing rapidly. 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 the retailer’s stores are confined to the U.S., its direct-to-consumer business ships merchandise globally.
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 15% of the retailer’s value according to our estimates.
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How Has Aeropostale’s Direct-To-Consumer Business Evolved Over Time?
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 as the company’s competition with more fashion-focused retailers has increased. Nevertheless, its direct-to-consumer revenues have increased by an annual average of 35% over the past three years. 
The company’s direct-to-consumer business as a percentage of overall revenues has grown from 2.5% in 2007 to 8% in 2011.  Going forward, we expect this figure to gradually rise to 11% by the end of our forecast period.
How Was Aeropostale Able To Ensure Growth In Direct-To-Consumer Business?
Aeropostale has been able to establish a stable supply chain in 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 stores. 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.  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 8.5 million currently.  
What Does This Mean For Aeropostale?
The direct-to-consumer business constitutes a very small part of Aeropostale’s revenues, and the segment’s recent growth has been below the growth levels witnessed by the industry. However, this business generates higher operating margins (at around 24%) compared to its retail stores (around 15%).  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. This is essential for the retailer as its brand image in the U.S. has suffered due to the lack of fashionable apparel. Moreover, with 1,000 stores in the U.S., the scope for expansion is also limited. 
Overall, we feel that even though Aeropostale’s direct-to-consumer business is small, its higher margins and global presence make it an essential element for future growth.
Our price estimate for Aeropostale stands at $13, which is about 5% above the market price.Notes: