Manufacturer of sneakers and sportswear, Nike (NYSE: NKE), grew its direct-to-consumer (DTC) channel eight times faster than its wholesale business last year. While this channel generated just $ 9.1 billion in revenue, or 28% of Nike brand sales for the company in fiscal 2017, it accounted for 70% of the growth.

Investors need to understand how Nike’s company-owned stores, digital commerce platform, and international locations all play a role in this exciting and growing part of the business.

The Nike store in New York’s Soho neighborhood. Image source: Nike.

Direct to consumer is more important than ever

As you can see from the graph below, DTC’s growth is fueling the bottom line for the entire company, despite its minority share in revenue.

A bar graph showing the last three years of revenue growth for Wholesale, DTC, and the whole business.  DTC far exceeds wholesale, which contributes to overall sales.  2017 figures: growth of 2% for wholesale trade, 16% for DTC and overall turnover of 6%.

Chart by author. Nike’s 2017 10-K fiscal year data. All graphics in this article use Nike’s fiscal year ending May 31.

On the latest earnings conference call, CFO Andy Campion underscored the importance of the direct channel, saying it was “more productive and profitable than other less differentiated consumer experiences.”

The DTC business is both fast growing and high margin – a solid combination. Next, let’s peel the onion and look specifically at the company-owned stores, which account for the bulk of this channel’s revenue.

Nike stores are a powerful engine of growth

At the end of fiscal 2017, the company had 243 Nike-branded and online stores in the United States, and a further 713 in locations outside of the United States. These 956 stores achieved an impressive sales of $ 6.9 billion last year and also had strong same-store sales performance. Remind that same store sales compare stores that have been open for more than a year and that have not changed significantly in size or been relocated permanently in the past year.

Bar chart showing three years of comparable store growth by region.  The international regions all far exceed the growth of the United States for each year.

Chart by author. Nike’s 2017 10-K fiscal year data. All graphics in this article use Nike’s fiscal year ending May 31.

While growth has slowed across the world, numbers outside the United States remain robust. All regions outside of the United States experienced currency neutral growth of 9% or more, which is particularly impressive since Nike does not include its digital sales in these numbers.

The company also uses these stores to showcase its brand. For example, the Store in the Soho district of New York is an impressive five-story showroom with a half-basketball court for customers to perform real-world product testing.

And while company-owned stores make up the bulk of DTC’s revenue, the digital channel is growing even faster.

Digital is developing faster. . . more profitable

Nike includes sales from its 45 e-commerce websites and Nike + and Nike + SNKRS apps as part of its digital commerce sales. This subset of the DTC channel has nearly doubled over the past three years to reach $ 2.2 billion in 2017, with growth of 30% in the last fiscal year. On the last earnings conference call, Campion highlighted how e-commerce helps bottom lines.

[…] Meeting demand through NIKE.com generates nearly double the revenue and a significantly higher margin on every transaction and over time we see digital growth as an asset to NIKE’s profitability.

While the company doesn’t detail its digital business in more detail than total revenue, it is certainly a significant growth driver, along with international sales of DTC.

International is the future

International sales represent more than half of DTC’s total revenue, amounting to $ 4.6 billion in fiscal 2017. Each of the company’s international regions has grown faster than the North America, and with a wide margin. DTC activity in each region has also grown several times faster than its corresponding wholesale activity.

Bar graph with Nike YOY revenue growth by geography showing DTC revenue far exceeding wholesale growth in each region.  The other notable thing is that all the international regions are exceeding the revenue growth in the United States.

Chart by author. Nike’s 2017 10-K fiscal year data. All graphics in this article use Nike’s fiscal year ending May 31.

To underscore the scale of this international presence, Nike’s direct business in China equals Under protectionDTC’s global total of $ 1.5 billion when you compare the two companies’ most recent fiscal year numbers.

There is no denying that Nike still depends on its wholesale partners, as they accounted for 72% of Nike brand revenue last year. But its direct-to-consumer business is growing faster than wholesaling, however it is measured, while contributing more to the bottom line. It’s no wonder the company is looking to step on the accelerator on the DTC channel. Investors should keep a close eye on this part of the business if they are to get a clear picture of Nike’s future growth.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.