Macy's Inc, the second largest U.S. department store company, is partnering with toy store chain FAO Schwartz to let it open smaller stores within nearly 700 of its locations over the next two years.

FAO Schwarz will open stores at retail location exclusively in Macy's. The toy store company will continue to operate its own stores independently.

The FAO Schwarz store-within-a-store concept was tested successfully in fall 2007 at Macy's on State Street in Chicago, Macy's said in a statement.

Terry Lundgren, chief executive officer of Macy's believes the interesting and distinctive products that appeal to our customers and will drive store traffic, particularly to our children's departments.

The partnership will bring the FAO Schwarz experience back to local communities, said the toy retailer's chief executive Edward Schmults.

The FAO Schwarz products will feature its own private label collection exclusive to Macy's and FAO Schwarz stores in addition to the company's pre-existing brands.

Full-size FAO Schwarz shops of between 1,000 and 3,500 square feet will open in about 75 Macy's locations. Another approximately 200 Macy's stores will host smaller FAO Schwarz departments between 200 and 300 square feet.

The companies will also partner to provide toys at the Macy's web site.