Barclays initiated coverage of the food and staples retailing industry with a Neutral rating, warning that food retailers are facing two headwinds: year after year of food deflation and renewed disruption by Wal-Mart (WMT). In addition to upgrading Wal-Mart to Overweight from Equal Weight, the firm lists Sprouts Farmers Market (SFM) and Performance Food Group (PFGC) as among those in the space it recommends to investors. On the other hand, Barclays initiated United Natural Foods (UNFI) and Sysco (SYY) with Underweight ratings, its equivalent of a "sell."

OVERWEIGHT NAMES: Wal-Mart's wage increases are "resonating" with employees and customers, its products are improving, and its execution has become better, according to Barclays analyst Karen Short. These changes are enabling the retail giant's U.S. comparative sales to rise, added the analyst. "Wal-Mart's momentum is here to stay," she stated, adding that Wal-Mart's stock can reach $95 if its momentum can continue and is unlikely to drop below $68 if the company does badly. The analyst set an $87 price target on the stock. Sprouts is a "best-in-class" growth stock, as it can gain share through strong comparative sales gains and unit growth, while it has price and quality advantages over its competitors, according to Short. Although the second half of 2016 "will be extremely challenging" for Sprouts, it has multiple ways to create value over the longer term, the analyst stated. Specifically, it can reduce its debt and introduce a dividend, accelerate its expansion in Florida, and introduce new merchandise initiatives, wrote Short, who set a $24 price target on the shares. Performance Food Group has strong revenue trends, improving returns and growing free cash flow," Short wrote. In a positive scenario, the stock can reach $31, she stated. Specifically, the shares can reach that level if the company can maintain its "strong momentum," reduce its debt, and maintain its return on invested capital growth, Short stated, adding that she sees a 70% chance of such a scenario materializing.

UNDERWEIGHT NAMES: Sysco's comparisons are set to get more difficult as its "powerful tailwinds" dissipate, wrote the analyst. Additionally, after the stock rose 36% since July 2015, the shares have "few catalysts," she believes. Furthermore, some of the catalysts that drove the stock appreciation, including strong restaurant trends and low fuel prices, will probably reverse going forward, added Short, who set a $48 price target on the stock. Many of the products that United Natural sells are becoming widespread and commoditized, according to the analyst. Consequently, the company's sales have slowed, she noted. United Natural can respond by selling more fresh, gourmet and ethnic products, but that strategy increases shareholders' risk, she believes. Additionally, the company's acquisitions are hurting its ROIC and free cash flow, believes Short, who set a $40 price target on the stock.

PRICE ACTION: In afternoon trading, Wal-Mart added 0.3% to $72.50, Sprouts advanced 1.4% to $20.74, Performance Food gained 2.3% to $24.97, United Natural fell 1.4% to $39.14 and Sysco gave back 0.7% to $49.66.