BAY STREET-Few investor bargains among Canadian retailers

* Christmas sales seen improving from poor 2008

* Retailer stocks fully priced after recent run up

* Consumer caution creates big downside risk

By Scott Anderson

TORONTO, Nov 15 (Reuters) - Canadian retailers are expected to notch improved holiday sales this year compared with the dismal performance of 2008, but the sector offers few bargains for investors after a recent rally.

Analysts warn that a recovery in valuations means the sector could also be more vulnerable than usual to downside surprises -- a significant risk in an economy still struggling to emerge from recession.

"The retailers had a pretty terrible Christmas last year, so I think, just from a comparative point of view, it's going to be a fair bit easier this year. The trend is improving against pretty weak numbers last year," said Bill Chisholm, an investment analyst at MacDougall, MacDougall & MacTier in Toronto.

"We will probably get surprisingly positive results quarter over quarter this year. But how much of that is already built into the market? ... A fair bit I think."

Investors are starting to get a look at how the retailers fared during the summer as their third-quarter results -- which included key back-to-school sales -- start to trickle in. Most have met or beaten analyst expectations.

Buoyed by those results, the Toronto Stock Exchange's consumer discretionary index .GSPTTCD has already risen an impressive 12.1 percent so far this year, despite the prolonged downturn and weak consumer confidence.

This has been led by strong performances from names usually on the holiday shopping list of most Canadians: Sporting goods chain Forzani Group (FGL.TO), which has risen 44 percent in the past year; trendy workout clothing store Lululemon Athletica (LLL.TO), which has jumped 98 percent; and Canadian Tire (CTCa.TO), which has climbed 27 percent.

Retail stocks are trading at about 14 times expected 2009 earnings, based on a calculation using Thomson Reuters data. Despite the still weak economy, Chisholm noted this is roughly in line with historical norms.

"It's hard to imagine that you are seeing a lot of big steals in the space, given their performances over the past year," said Candice Williams, a retail analyst at Genuity Capital in Vancouver, British Columbia.

"We are expecting a few people to outperform on the margin front, but, as a group, we are not looking for discretionary same-store sales to provide a whole bunch of support to the share price going into the new year."

Analysts said any turnaround in sales would not be evident until late January or early February, when big retailers, who count on Christmas for between 25 percent and 35 percent of annual sales, report key same-store sales along with their quarterly results.

Canadian retailers, unlike their U.S. counterparts, which disclose monthly sales figures, report bellwether sales numbers only four times a year.