Given record online sales that stood in stark contrast to terrible in-store numbers, it’s easy to understand those retailers’ decisions, and to buy into the notion that retail is simply and irreversibly shifting online and away from physical stores.

But one big-box chain is making the opposite bet. Kohl’s is also struggling with declining sales (comparable sales fell 2.4% last year and haven’t risen meaningfully in any year since 2010) and shrinking shopper traffic. But it’s betting big that maintaining a plentiful fleet of stores is what will save the day. Its argument: Stores support e-commerce, offer suppliers an appealingly wide distribution and keep the retailer top of mind.

Here’s the twist: While Kohl’s isn’t closing stores, hundreds of them will be made smaller.

Kohl’s has poured $2 billion into tech initiatives in the last three years on things like supply-chain improvements, a tighter integration of stores and online, and shopping apps. And many of those efforts have been in service of letting Kohl’s do as much for its customers, if not more, with less physical space.

“It’s more than just small for the sake of small—it’s small because technology enables us to be small,” Kohl’s CEO Kevin Mansell told Fortune in an exclusive interview ahead of his talk on Tuesday at the Shoptalk industry conference in Las Vegas.

Some of the tech investment is aimed at helping Kohl’s maintain leaner, better planned inventories so it will need less space in stores. The department store chain has also invested heavily in its app and web site and their interaction with Kohl’s inventory management system so that stores are a now a key part of its e-commerce fulfillment network. During the holiday quarter, about one-third of Kohl’s orders were either picked up in a store, or shipped by one.

And the retailer is equipping sales staff with handheld devices that will help them ring up a sale anywhere in the store, meaning stores will need fewer cash registers in the future, freeing up the space they occupy.

Of the chain’s 1,160 stores, some 300 are already small, between 35,000 and 55,000 square feet, compared to the standard 80,000 square feet of a Kohl’s. (A typical Macy’s is 120,000 square feet, as a point of comparison.) The bulk of any new Kohl’s stores will be in the smaller size range. And Kohl’s will shrink another 200 of its standard-sized stores this year, bringing to 500 the number of stores in a more compact format. (In some cases, Kohl’s has freed up space for other retailers.)

In contrast to Macy’s, which is closing 100 stores, or Penney, which is closing 138, Kohl’s is not planning to shutter any significant amount of stores. That decision in part reflects Kohl’s assessment of a test it conducted last year, when the chain, which had never had to pare its fleet, eliminated 19 stores to understand the impact on sales.

The results were not encouraging. Kohl’s nearby locations only managed to recoup 34% of sales at the closed stores (it had expected to keep at least 38%). What’s more, debunking the idea that online is an easy substitute for stores, digital sales fell 10% in those areas, and the retailer is likely to steadily lose more of that business over time.

Some 70 million people shop at a Kohl’s at least once a year, and 85% of its sales are in stores, so Kohl’s is loath to throw any of that away. “People still spend a lot of their time and money in stores,” said Mansell, noting that the vast majority of individual Kohl’s stores turn a profit.

Still, with shopper traffic down 6% last year and comparable sales forecast to fall as much a 2% (on top of a 2.2% decline last year) or be unchanged at best, the retailer is under the gun to get more mileage out of its stores.

One size does not fit all

The new Holy Grail in retail is what executives call “localization,” a strategy of eschewing the cookie-cutter approach to selling the same items in the same way across the country. Everyone from Target (TGT) to Penney to Macy’s are talking up localization as a way to stay relevant.

“What we need to carry in a store is what’s relevant to that store’s customer,” says Mansell. And that ultimately means fewer kinds of items in a store, and therefore less need for space.

Kohl’s has more broadly made it a high priority to stock less merchandise in stores, lest it wind up needing to sell more of it at bargain basement prices. The saving grace for Kohl’s during the last holiday season was tight inventory management, which kept clearance sales to a minimum. Mansell said last month that Kohl’s goal is to reduce inventory 3% a year for the next three years.

A faster, nimbler management system “would allow us to have less inventory in the store,” Mansell said. And the calculus is that Kohl’s e-commerce will play a crucial role in complementing the in-store assortment.

The case for leaner inventory applies to another major priority for Mansell: competing with fast-fashion chains like Zara and H&M by speeding up the design-to-production-to-in-store-arrival cycle for its house brands, which include Sonoma, Apt. 9 and Croft & Barrow. It’s an increasingly big priority for Kohl’s given those brands’ relatively weak performance during the holidays, compared to national brands like Nike (NKE) and Levi’s, which sold well at Kohl’s stores.

Some 25% of Kohl’s house brand business, which generates nearly half of its sales, is now produced under a quicker process, and Mansell has told Wall Street that would rise to 40% this year.

Smaller stores that are easier to manage and re-stock are key to harnessing that benefit.

Searching for the right footprint

Of course, any major cross-country retailer has to also think about serving large national brands. One of department stores’ biggest draws, despite the sector’s deep woes of late, is their large footprint, which makes them essential partners for any brand that wants to be sold far and wide.

Kohl’s extensive fleet was a key selling point in convincing fast-growing Under Armour (UAA) to sell its athletic wear at Kohl’s starting this month, as was Kohl’s deep reach with women, a so far elusive clientele for Under Armour. So closing hundreds of stores would undercut one of the retailer’s key advantages. “You just can’t replicate that online,” Mansell says of Kohl’s all-out Under Armour presentation.

“If Kohl’s is able to offer a more effective distribution network, we look more appealing,” Mansell continued. And in a veiled reference to the rivals that are closing large amounts of stores, he added: “There’s a market share opportunity.”

Courtesy of Kohl's

And this is where the size of the fleet goes hand in hand with the smaller size of 500 stores: It’s easier to manage the upkeep of those stores, refresh the merchandise, and improve the shopper experience and product presentation at a time it is essential to give shoppers a reason to come into the stores. (In the service of a similar goal, Macy’s has singled out 150 of its 670 or so stores that will get more attention.)

For decades, Kohl’s was one of the fastest-growing companies in retail history, winning over legions of shoppers with popular, affordable brands, good customer service and neat, well laid-out stores away from malls and closer to where shoppers live. Kohl’s, founded near Milwaukee in 1962, grew from 79 stores in 1992 to nearly 1,150 two decades later.

But the retailer can no longer get by with offering the same merchandise in the same formulaic manner in stores laid out the same away across the U.S. Paradoxically, tech is what has created massive tumult in retail, but tech is what also offers Kohl’s and others a way out of their travails.

“We want to keep our stores fresh and flexible and we want to use technology to enable a smaller footprint,” Mansell said.