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We reaffirm our Neutral recommendation on Wal-Mart Stores Inc (WMT - Analyst Report). While the retail giant undoubtedly enjoys sound long-term fundamentals such as a huge scale, geographic and product diversities, aggressive cost savings and strong international presence, it expects a gloomy global consumer spending environment to continue to hurt results in future quarters.

Why the Reiteration?

Walmart has delivered weak results in all the three quarters of fiscal 2014. A challenging retail environment in the U.S. as well as in most international markets due to cautious consumer spending has been hurting the company’s top line since the last three quarters of fiscal 2014.

Weak spending from lower- and middle-income segment consumers is hurting the company’s U.S. comparable store sales. Middle-class consumers are struggling to cope with rising gas prices, delayed income tax refunds and higher payroll taxes, which have increased 2% in the U.S. since Jan 2013.

The economic strains in the U.S. and abroad are likely to pressurize its low-income shoppers for the rest of fiscal 2014 and fiscal 2015. The company thus expects the challenging sales environment and currency headwinds to hurt fourth quarter fiscal 2014 results as well, scheduled to be reported on Feb 20.

The company beat the Zacks Consensus Estimate for earnings in the third quarter of fiscal 2014 but missed the same for revenues due to a gloomy consumer spending environment. Moreover, the company narrowed its earnings expectations for the fiscal year. Walmart has slashed the upper end of the adjusted earnings guidance range from $5.10 - $5.30 to $5.11 - $5.21 per share.

Despite the short-term concerns, we are impressed with the company’s sound fundamentals. Its size and scale of operations and initiatives to reduce operating expenses make it appealing. The company has 8,500 stores in 15 countries, under 55 different names and has wholly-owned operations in Argentina, Brazil, and Canada. Walmart is also known as the biggest private employer in the world with over two million employees.

The company’s significant exposure in the international markets makes it the largest retailer in the world. Currently, the company is targeting China as a strategic market. It plans to focus mainly on its Supercenters and Sam’s Club stores and expects to open two Sam’s Club locations every year from 2014 onward in China. In addition, Walmart plans to open more than 100 outlets in China between 2014 and 2016, which will create approximately 19,000 retail jobs.

Walmart has also been expanding its e-commerce business. Walmart’s dot com division @WalmartLabs went on a start-up acquisition spree in 2013, buying four companies — Torbit, OneOps, Tasty Labs and Inkiru — that build tools to compress data and speed up websites. The company expects such acquisitions to strengthen its online business.

However, gloomy consumer spending in the near term, currency headwinds, inventory concerns and continued economic pressure keep us on the sidelines. The bribery allegations and complaints about violating food safety standards in China are also denting the company’s reputation. Walmart thus holds a Zacks Rank #3 (Hold).

However, better-ranked stocks in the retail sector include Conn’s Inc (CONN - Snapshot Report), Etablissements Delhaize Fr (DEG - Snapshot Report) and The Men’s Wearhouse, Inc. (MW - Snapshot Report). While Conn’s carries a Zacks Rank #1 (Strong Buy), Etablissements and Men’s Wearhouse carry a Zacks Rank #2 (Buy).

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