BUY OR SELL-Will Aussie retailers be naughty or nice?

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* David Jones already pricing in profit upgrade

* Kathmandu Holdings favoured for its growth plans

* Sector .AXDJ up 70 pct from lows as economy recovers

By Victoria Thieberger

MELBOURNE, Nov 24 (Reuters) - Shares of Australian retailers, such as David Jones (DJS.AX) and JB Hi-Fi (JBH.AX), have surged as investors scramble to buy on the realisation the economy has escaped the global recession.

The consumer discretionary sector has rallied 70 percent from the March lows, inspiring a flurry of IPOs and outpacing the broader market's 50 percent rise.

Analysts also expect solid sales in the crucial Christmas season but some say the central bank's campaign to lift interest rates from emergency lows could dampen spending in 2010 [ID:nSYD415302].

The question now is will there be a hangover in the new year?

"A BIT OVERCOOKED"

"Some of these names look a bit overcooked, at least in the near term. They are already pricing in the good news," said Karara Capital portfolio manager Akshay Chopra.

He pointed to upmarket retailer David Jones Ltd, whose shares have more than doubled on expectations it will lift its profit guidance after the Christmas trading season. David Jones is trading at 17 times 2010 earnings, according to Thomson One data. [ID:nSYD157813]

"It's difficult to dissect where consumption is going to end up next year, with rates going up," Chopra said. The boost from rising house and stock prices is likely to be counterbalanced by higher mortgage interest rates.

Constellation Capital Management analyst Brian Han, who does not hold shares in David Jones or JB Hi-Fi, said investors should be cautious about assuming good trading conditions will continue.

"In most cases, the stocks are more than fairly valued and they will be cycling against a spending level that was boosted by stimulus," he said, pointing to the millions of dollars of government cash payments to households that lifted consumption.

Market darling JB Hi-Fi Ltd, a home entertainment retailer that has more than tripled from its 12-month low and has a strong pipeline of new store roll-outs, was originally deserving but is now trading at "very ritzy" multiples, Han said.

JB Hi-Fi shares hit an intraday record on Tuesday of A$23.64 and are trading near 21 times 2010 earnings.

MORE TO GO

"Australian retailers are reasonably well placed as a group, they've all got store roll-out programs and they've got lots of capex to refurbish their businesses and make their product more competitive," said Ausbil Dexia portfolio manager John Grace.

His picks include recently floated outdoor gear chain Kathmandu Holdings (KMD.AX)KMD.NZ for its growth plans and strong margins, JB Hi-Fi as a "category killer" in home entertainment.

Grace also favours top department store chain Myer Holdings Ltd (MYR.AX), which is showing value below its Nov. 2 IPO listing price of A$4.10 and a multiple around 14 times earnings.

"Myer management has done a great job in turning that business around and getting it back on track," said Grace, who bought into the IPO and topped up post the float. (Editing by Valerie Lee) ((victoria.thieberger@reuters.com; +61 3 9286 1421; Reuters Messaging: victoria.thieberger.reuters.com@reuters.net))