Upscale retailer Saks and toy chain FAO Schwarz will be joining forces this year to put the toy aisle back into the department store. The two companies have announced that they’ve signed a letter of intent that will see in-store boutiques featuring merchandise from FAO in most of Saks Department Store Group’s 245 locations by the second half of this year.

Ranging in size from 600 to 3,000 square feet, the store-in-stores will sell educational products, toys, games, books, multimedia items and candy from FAO Inc. brands FAO Schwarz, The Right Start, Zany Brainy Kids, FAO Express and FAO Schweetz.

Retail outlets in Saks’ broad network of ancillary chains – including Parisian, Proffitt’s, Carson Pirie Scott, McRae’s, Younkers, Herberger’s, Bergner’s and Boston Store – will house the boutiques, and additional seasonal shops featuring Zany Brainy Kids and FAO Express merch will also make an appearance for the holidays.

Saks, which recently acquired a minority stake in FAO and has been given a seat on its board, is also considering several joint marketing initiatives with the toy chain, including co-ownership of an in-store and on-line electronic baby gift registry business that would be available to both stores’ customers.

Saks’ investment in the chain is part of FAO’s restructuring plan, submitted in January after the ailing company filed for Chapter 11 bankruptcy protection late last year. The plan also calls for the closure of between 75 and 80 stores (nearly a third of FAO’s outlets).