This is exactly what Imagination Acres Farm does. It’s an Etsy shop that makes custom teddy bears with old baby pajamas.
This way you can turn the unusable clothes into cute mementos for yourself, your baby and even for relatives. The company calls the service Memory Bears and it’s gaining popularity.
All you have to do is send the pajamas to the company and they will make them into cute teddy bears. Another option is to make an elephant.
The bears have a similar design with spread paws, ideal for hugging. Popsugar reports that one bear costs $35. The shop will reopen in August, as the owner is on a summer break. They have set up their Etsy account with alerts though.
Or, if you wish, you can simply find a pattern and use it to create a teddy bear or a stuffed animal yourself. And, of course, you can always donate the pajamas for charity. This is ideal if you have several sets. This way you can turn a couple into Memory Bears and donate the rest.