Saks to the rescue. Upscale department store Saks Fifth Avenue is taking an equity stake in bankrupt toy retailer FAO Schwartz and will begin selling FAO merchandise in its stores. The move makes a lot of sense:

"It's a great deal ... FAO has always positioned itself as the Tiffany's of the toy business and wanted to attract the upscale shopper, and Saks Fifth Avenue attracts that same demographic," said Jim Silver, publisher of Toy Wishes magazine.

"It also allows FAO to be in a place where people might not be thinking about toys ... A consumer is shopping for kids' clothes, and stumbles across the toy department and bingo, you have an add-on purchase."

Competing head-on with Wal-Mart and Toys R Us was a losing proposition for FAO, as they have unfortunately discovered. Instead, FAO should pursue more of these ventures that firm up its position in the upscale toy market. The alliance will help Saks as much as it helps FAO:

"One of the great challenges facing department stores is the lack of differentiation in their product mix," said Jeff Stinson, an analyst with Midwest Research. "By rolling out the FAO product, it gives Saks something unique and that's a positive for them, especially when the holiday season rolls around."