German Chancellor Angela Merkel's conservatives defeated the ruling Social Democrats (SPD) in a key state election on Sunday, exit polls showed, boosting their hopes of retaining power in September's national vote.
Germany's western state of North Rhine-Westphalia held elections on Sunday, which are seen as the last public barometer for the upcoming federal elections.
Schulz left his position as president of the European Parliament in January to challenge Merkel.
State has been controlled by the Social Democrats for 46 of the past 51 years leading many to call the victory a historic one.
The other likely option is for a "grand coalition" with the SPD that would mirror Merkel's national government, with the SPD as the junior partner. He said that "we will sharpen our profile further - we have to as well".
Schulz's chances of becoming chancellor still "seem material" given that he already energized his party's voters once, Ricardo Garcia, a European economist at UBS, said in a research note.
At the same time, the Green Party, now the junior coalition partner to the SPD in the government of Germany's most populous state, took a massive hit, dropping down to 6.4%.
The SPD has run the state - Germany's most populous - for most of the post-war period.
"We have spoken a lot about security on the streets", Armin Laschet, CDU leader to North Rhine -Westphalia told CNBC Monday, remarking on his party's new success. But overshadowing Kraft's campaign for yesterday's election has been criticism of her government's handling of the 2016 New Year's Eve attacks on women in Cologne, as well a December terrorist attack on a Berlin Christmas market that was carried out by a one-time resident of North Rhine Westphalia.
The populist AfD (Alternative for Germany), which has railed against the migration influx, hopes to win its first seats in North Rhine-Westphalia, which would give it seats in 13 of 16 state parliaments.
Germany's liberal FDP party which dropped sharply after being the junior coalition partner in Merkel's second term, continued its comeback with 12% of the vote in the state and giving a potential coalition of CDU and FDP a small majority in the state assembly.
SPD state premier Hannelore Kraft quickly conceded defeat and said she would stand down as her party's local leader.
Kraft announced that she was stepping down as the Social Democrats' regional leader. In the state's last election in 2012, the Social Democrats beat the CDU by 39.1 percent to 26.3 percent.
It is the final state election in Germany before September's federal contest, and it is in the biggest state, North Rhine-Westphalia.
Asked about Germany's government after September her chief of staff, Peter Altmaier, said that "we always have to keep a cool head ... we shouldn't talk about coalitions before the harvest is in".
It carries even higher stakes this year, being the last regional vote before national polls and having a direct impact on whether the SPD can close a nationwide gap of around 10 percentage points with the CDU.