CINCINNATI - FAO Schwarz will open toy stores in nearly 700 Macy's department stores over the next two years in a move that both stores hope will drive traffic in a tough economic environment.

The two companies announced Friday that about 75 full-size FAO Schwarz toy stores will open across the country in the fall, along with about 200 smaller shops that will be up to 300 square feet.

Macy's shareholders learned of the venture at their annual meeting Friday.

Macy's CEO Terry Lundgren told shareholders that FAO Schwarz will open stores in up to 275 of Macy's stores this fall, and the companies plan to expand over the next two years to include 685 Macy's stores that have children's departments.

Macy's has five Triangle stores. A spokesman said it's too soon to say how quickly the local stores will change.

"We expect it to drive new customers into our stores and to insert a new level of fun and excitement onto the children's selling floor," Lundgren, who is also chairman and president of Cincinnati-based Macy's shareholders, told shareholders.

Lundgren said FAO Schwarz gave its first Macy's store-within-a-store a trial run in Chicago late last year.

"Not only did it perform beyond our expectations, the entire children's apparel business performed well above our expectations," he said.

Lundgren told reporters after the meeting that the deal was one more step toward reinventing department stores -- one that he said would give customers another reason to choose Macy's over its competitors.

It's a good move, said Patricia Edwards, a retail analyst with Wentworth, Hauser and Violich.

"Macy's had gotten away from having a toy department, but I think that if you can incorporate more of the shopping experience and give the consumer one more reason to come into the store and keep them in your store longer, it's a good thing," Edwards said.

FAO Schwarz CEO Ed Schmults said Friday that products in the smaller shops will be from the FAO private label collection, but the larger stores will carry a mix of private label and other brands sold by FAO Schwarz. The 146-year-old company continues to independently own and operate its own stores, including a flagship store on New York's Fifth Avenue.

The deal was appealing to the toy retailer because of the national scope that Macy's provides, and the opportunity it gives FAO Schwarz to take its stores to local communities, Schmults said.

Macy's, formerly known as Federated Department Stores, operates more than 850 department stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names Macy's and Bloomingdale's.

The deal is another in a growing number of strategic alliances among retailers, and it makes sense in the current climate, said Wendy Liebmann, president of WSL Strategic Retail.

"If people are spending anything on anything beyond groceries and gas, they're spending on their kids," Liebmann said.