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U.S. food retailers are facing the most daunting challenges the industry has seen in more than two generations, as price deflation and the resurgence of Walmart Stores (WMT) as an industry leader emerge as the dominant themes of the business, according to Barclays.
"This is the worst possible environment for a lot of retailers," Karen Short, a food-retailing analyst at Barclays, said in an interview.
Barclays is pessimistic about the prospects for the majority of food retailers. It has an "Equal Weight" rating on 14 stocks in the sector, and described as "in transition" companies from the dollar-store sector -- Dollar General (DG) and Dollar Tree (DLTR) -- as well as higher-end food retailers such as Whole Foods (WFM) .
In a recent research note, the firm also described nutrition supplements retailers GNC (GNC) and Vitamin Shoppe (VSI) as companies that are "attempting to reinvent" themselves, facing "meaningful secular challenges, and in most cases, valuation reflects these challenges." GNC has lost 58% of its value since its $35 April high of $35, while Vitamin Shoppe has dropped 35% year to date.
Short noted in an interview that most food retailers haven't seen extensive deflationary prices in their principle products since the early 1960s, meaning that no one in management has faced such circumstances at any point in their careers. That means they don't have any playbook to resort to.