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Wal-Mart Stores Inc (WMT - Analyst Report) is set to report fourth quarter fiscal 2014 results before the opening bell on Feb 20. Last quarter, this retail giant posted a positive surprise of 0.88%. Let’s see how things are shaping up prior to the announcement.

Factors to Consider

Walmart has been facing severe challenges since the last few quarters related to the restructuring of Sam's Club unit in the United States, food safety allegations, and weakness in the emerging markets, including the closure of stores in Brazil and China. In fact, Walmart delivered weak results in all the three quarters of fiscal 2014 and slashed its guidance for fiscal 2014 on Jan 31. This leads us to believe that the problems are indeed serious.

For the fourth quarter, Walmart expects its earnings to be at or slightly below the low end of its previous forecast of $1.60 to $1.70 per share. For fiscal 2014, Walmart expects its earnings to be at or slightly below the low end of its previous forecast of $5.11 to $5.21 per share.

In addition, the retailer expects its fourth-quarter comparable store sales for its Walmart U.S. and Sam's Club segments to be slightly below its prior forecast. Lower comp sales could be attributed to reduced food stamp benefits under SNAP (the U.S. government Supplemental Nutrition Assistance Program) for millions of Americans and unfavorable weather conditions, which resulted in store closures.

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. The economic strains in the U.S. and abroad are likely to pressurize its low-income shoppers in fiscal 2015 as well.

Walmart International has also been witnessing sluggish comps for the past few quarters owing to a weak consumer spending environment and changing consumer patterns. The unit is also the focus of a costly bribery probe. Moreover, it closed about 50 underperforming stores in Brazil and China last year, anticipating sluggish growth in the Brazilian market for the fourth straight year.

Moreover, recently, Walmart announced that it is eliminating 2300 employees, including assistant managers and some hourly workers at its Sam’s Club warehouse division in an effort to streamline its business structure. We believe the layoffs announced across the board in the retail sector were the result of weak holiday season sales.

Though we are positive on the company’s sound long-term fundamentals, the current scenario is alarming for its investors.

Not only Walmart, other retailers like Kohl’s Corporation (KSS - Analyst Report), hhgregg Inc and GameStop Corp  also trimmed their guidance due to a weak holiday season.

Earnings Whispers?

Our proven model does not conclusively show that Walmart is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Negative Zacks ESP: The Expected Surprise Prediction or ESP for Walmart is -0.63% as the Zacks Consensus Estimate of $1.60 is higher than the Most Accurate estimate of $1.59 per share.

Zacks Rank #3 (Hold): Walmart’s Zacks Rank #3 when combined with a negative ESP of -0.63% makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Other stocks in the retail sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Foot Locker Inc (FL - Snapshot Report), with an Earnings ESP of +8.00% and a Zacks Rank #2 (Buy).

Finish Line Inc (FINL - Snapshot Report), with an Earnings ESP of +2.35% and a Zacks Rank #2.

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