<PAGE>   1


                                                                 EXHIBIT 10.1



                            INDEMNIFICATION AGREEMENT


         THIS INDEMNIFICATION AGREEMENT, is made as of May 22, 1998 by and
between ShopKo Stores, Inc., a Wisconsin corporation (the "Company"), and
Richard D. Schepp ("Indemnitee").

         WHEREAS, Indemnitee is a member of the Board of Directors and/or an
executive officer of the Company; and

         WHEREAS, it will be difficult to retain directors and executive
officers of the Company unless such persons are adequately  indemnified  against
liabilities incurred and claims made in performance of their duties as directors
and/or executive officers of the Company; and

         WHEREAS, Article VII of the Company's By-laws (the "By-laws") provides
for the indemnification by the Company of the officers and directors of the
Company and, as additional consideration for the services of Indemnitee, the
Company has obtained at its expense directors' and officers' liability insurance
("D & O Insurance") covering Indemnitee with respect to Indemnitee's position
with the Company; and

         WHEREAS, to induce Indemnitee to continue to serve as a member of the
Board of Directors  and/or as an executive  officer of the Company,  the Company
has  determined  that it is in its best  interests to assure  Indemnitee  of the
protection  currently  provided  by  the  By-laws  and D & O  Insurance  and  to
indemnify  Indemnitee to the fullest extent permitted by the Wisconsin  Business
Corporation Law (the "WBCL").

         NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:

         1. Indemnification. The Company agrees to indemnify and hold Indemnitee
harmless from and against any and all claims, liabilities, damages, judgments,
penalties, fines, settlements, disbursements or expenses of any type whatsoever
(including, without limitation, reasonable attorneys' fees) incurred by
Indemnitee in or arising out of (A) the status, capacities or activities of
Indemnitee as a director and/or an executive officer of the Company, or (B) the
status, capacities or activities of Indemnitee with any Subsidiary (as
hereinafter defined) which status, capacities or activities with such Subsidiary
were undertaken in connection with the Indemnitee's position with the Company as
a director and/or an executive officer, in each case to the maximum extent
permitted under Subchapter VIII of the WBCL and Article VII of the By-laws as in
effect on the date hereof and as either may be amended to provide more
advantageous rights to the Indemnitee. For purposes hereof, "Subsidiary" means
any corporation, joint venture, limited liability company, or other business
entity in which the Company has a significant direct or indirect equity
interest.

         2. Advances of Expenses. Upon written request by Indemnitee and subject
to the requirements of the WBCL, the Company shall advance all expenses incurred
by Indemnitee

                                       26

<PAGE>   2



in connection with the investigation, defense, settlement or appeal of any
proceeding, action or investigation to which Indemnitee is a party or is
threatened to be made a party arising out of any matter for which the Indemnitee
is entitled to indemnification pursuant to Section 1 hereof to the maximum
extent permitted under Subchapter VIII of the WBCL and Article VII of the
By-laws as in effect on the date of this Agreement and as either may be amended
to provide more advantageous rights to the Indemnitee. The indemnification
provisions contained in Subchapter VIII of the WBCL and Article VII of the
By-laws, as in effect on the date hereof and as either may be amended to provide
more advantageous indemnification rights to Indemnitee, shall be deemed to be a
contract between the Company and Indemnitee and any amendment, modification,
revocation or repeal of any such provisions of Subchapter VIII of the WBCL or
Article VII of the By-laws shall not limit any rights of Indemnitee hereunder to
indemnification or the allowance of expenses.

         3. Other Rights of Indemnitee. The right of Indemnitee to
indemnification or advance of expenses pursuant to this Agreement shall not be
exclusive of other rights Indemnitee may have (i) under applicable law, (ii)
pursuant to other agreements between the Company and Indemnitee or the By-laws
(subject to Section 16 hereof), or (iii) pursuant to any agreement with a third
party (by way of insurance, indemnification or otherwise).

         4. Absolute Right to Indemnification and Advancement of Expenses. The
Company agrees that it shall not, and the Company hereby waives all rights that
it has or may have to refuse to indemnify, or withhold payment of amounts for
which Indemnitee is indemnified hereunder, based on any breach or alleged breach
of any of the provisions of this Agreement by Indemnitee or for any other reason
whatsoever; provided, however, that the Agreement shall not require the Company
to make any payment prohibited by law, or to advance expenses contrary to the
provisions hereof. In the event Indemnitee is required to bring any action to
enforce Indemnitee's rights or to collect monies due to Indemnitee under this
Agreement, and is successful in such action, the Company shall reimburse
Indemnitee for all of Indemnitee's legal fees and expenses in bringing and
pursuing such action.

         5. Amendments to Wisconsin WBCL or Company's Articles or By-laws. The
Company shall not amend its Articles of Incorporation ("Articles") or By-laws to
reduce or eliminate the Indemnitee's right to indemnification or advances
provided for under this Agreement. Any amendments to the Articles or By-laws
made subsequent to the date of this Agreement which reduce or eliminate rights
of persons entitled to indemnification or advances under such Articles or
By-laws shall not limit the rights of Indemnitee pursuant to this Agreement. If
the WBCL, the Articles or the By-laws are amended so as to provide for greater
indemnification rights or benefits, Indemnitee shall be entitled to such greater
rights and benefits immediately upon such amendment. Subsequent amendments to
the WBCL or other applicable law shall in no way reduce Indemnitee's rights
under this Agreement.

         6. Maintenance of Insurance. The Company represents that it presently
has in force and effect directors and officers insurance under a directors' and
officers' liability insurance policy covering certain liabilities which may be
incurred by its officers and directors. The Company agrees to purchase and
maintain in effect, for the benefit of Indemnitee, D & O Insurance providing, in
all respects, coverage not less favorable than that presently provided pursuant
to said policy for so long as Indemnitee shall serve as director and/or
executive officer and until the later of (i) three years after Indemnitee ceases
to be a director and/or executive officer, as the case may be, for any reason,
or (ii) for so long as Indemnitee shall

                                       27

<PAGE>   3

be subject to any possible claim or threatened, pending or completed action,
suit or proceeding, whether civil, criminal or investigative, by reason of the
fact that Indemnitee was a member of the Board of Directors and/or an executive
officer, as the case may be. The unavailability or subsequent exclusions,
limitations or deductibles contained in coverage provided by such D & O
Insurance shall in no way limit the obligations of the Company to insure and
indemnify Indemnitee to the full extent required by this Agreement.

         7. Effect of Certain Proceedings. The termination of any proceeding or
of any claim, issue or matter therein, by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, does not of
itself adversely affect the right of Indemnitee to indemnification hereunder or
create a presumption that indemnification is not required. The knowledge and/or
actions, or failure to act, of any director, officer, agent or employee of the
Company shall not be imputed to Indemnitee for purposes of determining the right
to indemnification under this Agreement.

         8. Notification. Promptly after receipt by Indemnitee or the Company of
any notice or document respecting the commencement of any action, suit,
proceeding or investigation naming or involving Indemnitee and relating to any
matter concerning which Indemnitee may be entitled to indemnification or
advances pursuant to this Agreement, the party receiving notice will notify the
other of the receipt of same, but the failure by Indemnitee to so notify the
Company shall not relieve the Company from any obligation under this Agreement
or otherwise.

         9. Amendment. This Agreement may be amended at any time by written
instrument executed by the Company and Indemnitee.

         10. Notices. All notices and other communications between the parties
with respect to this Agreement must be made in writing and shall be deemed to
have been fully delivered as of the date on which they are hand delivered or
deposited in the United States mail for delivery by registered or certified
mail, postage and fees prepaid.

         11. Binding Effect. Due to the personal nature of the services to be
rendered by Indemnitee, Indemnitee may not assign this Agreement. Subject to the
foregoing, the provisions of this Agreement are binding upon and inure to the
benefit of (i) Indemnitee and Indemnitee's respective heirs, legal
representatives and administrators, and (ii) the Company and its successors,
transferees and assigns.

         12. Term of Agreement. This Agreement shall continue and terminate upon
the later of: (i) 10 years after the date that Indemnitee shall have ceased to
serve as a director and/or executive officer of the Company; or (ii) the final
termination of all pending proceedings in respect of which Indemnitee is granted
rights of indemnification or advancement of expenses hereunder and of any
proceeding commenced by Indemnitee pursuant to Section 14 of this Agreement
relating thereto.

         13. Validity. The invalidity or unenforceability of any provision of
the Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.

                                       28

<PAGE>   4


         14. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be discussed between the parties in a good
faith effort to arrive at a mutual settlement of any such controversy. If,
notwithstanding the parties' good faith efforts, a dispute remains unresolved
for a period of 45 days after initial notice from one party to the other of the
dispute, the parties shall submit such dispute to arbitration in accordance with
the rules of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction over the controversy. The costs
of the proceedings shall be paid by the Company. Unless otherwise agreed upon,
the place of arbitration proceedings shall be Brown County, Wisconsin.

         15. Subrogation. In the event of payment by the Company to Indemnitee
under this Agreement, the Company shall be subrogated to the extent of such
payment to all of the rights of recovery of Indemnitee, and Indemnitee shall
execute all documents and shall do all things necessary to enable the Company
effectively to bring suit to enforce such rights.

         16. Effectiveness. The provisions of this Agreement (i) shall supersede
the provisions of any Indemnification Agreement between the Indemnitee and the
Company's predecessor corporation which was incorporated under Minnesota law,
and (ii) shall be retroactive to cover any and all matters which may have taken
place prior to the date hereof for which the Indemnitee is entitled to
indemnification pursuant to Section 1 hereof. By way of example but not of
limitation, this Agreement shall apply to matters for which the Indemnitee is
entitled to indemnification pursuant to Section 1 hereof, regardless of whether
such matters relate to activities of Indemnitee or the Company preceding or
subsequent to the date of this Agreement.

         17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin.

         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.

                                                        SHOPKO STORES, INC.



                                                         By:                
-----------------------------                               --------------------
Indemnitee                                                  Its

                                       29