German grocery chain Aldi will open up to 10 locations next to Kohl’s stores later this year as the department store chain continues to pare back square footage and redeploy space, company executives told analysts.

The deal comes as Kohl’s moves to reduce size of its stores. Kohl’s stores will be made “slightly smaller” to free space for  Aldi locations, says a Kohl’s spokeswoman. Kohl’s stores average about 87,000 sq. ft., but the chain also has tested a 35,000 sq. ft. format in 12 places, CEO Kevin Mansell said. Kohl’s expects to have reduced the size of about 500 of its 1,165 stores by year-end.

The companies haven’t disclosed where the Aldi stores will located and how large they’ll be. Aldi North America, which has about 1,600 stores across 35 states in the U.S., said last year it would spend $3.4 billion to expand to 2,500 locations by 2022.

The co-location with Aldi is part of a larger Kohl’s move in that direction. “We thought we would start with grocery because they drive a lot of traffic, but we are looking for other retailers that drive traffic, have a strong brand and balance sheet and can co-exist with us for years to come,” Mansell said in listing fitness retailers and other grocery chains as other potential partners.

The smaller Kohl’s stores “have a phenomenal improvement in customer engagement, which is due the “ease of shopping and having less inventory on the floor,” Mansell said. Indeed, Kohl’s inventory in Q4 ended Jan. 27 shrank 6% to $3.5 billion, a decline tied to the chain cutting back its proprietary and private label brands in 2017. For example, Kohl’s ended its DTR with Cherokee Global Brands for the Tony Hawk and Hawk Signature brands in January (Inside Licensing Dec. 8).

Meanwhile, Kohl’s is looking to deepen its relationship with Amazon after having added kiosks last fall for Amazon’s branded electronics and smartphone products.  It also is handling Amazon returns at 10 stores in Chicago and Los Angeles. Kohl’s has had “initial discussions” with Amazon about expanding the concept, but still needs to “draw conclusions that could be applied more broadly,” Mansell said.

Overall, Kohl’s net income rose 85% to $468 million as revenue jumped 9.3% to $6.7 billion on a 6.3% gain in same-store sales.  Same-store sales rose 6.9% across November and December and were up around 2% in January. The increase revenue was driven by activeware, footwear and home, which saw a combined 25% gain in same-store sales. Nike and Adidas posted single- double-digit sales increases, respectively while Under Armour, which launched sales through Kohl’s last year, “outperformed our expectations” and is adding golf apparel this spring, Mansell said.

National brands posted an 11% increase in Q4 sales and accounted for 62% of Kohl’s revenue in the fiscal year ended Jan. 27. Kohl’s sales of proprietary and private label brands were flat with a year ago, due largely to assortment cutbacks, company executives said. Yet increases were registered in Lauren Conrad and Vera Wang women’s apparel, both of which are exclusive to Kohl’s. Ecommerce sales jumped 26% in Q4 and accounted for 25% of total revenue, Mansell said.

Contact:

Kohl’s, Bruce Besanko, Chief Financial Officer, 262-703-7000,