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investors are choosing to ignore the red flags in the discounter's third-quarter earnings report, instead focusing on the company's raised fourth-quarter outlook.

But there are both a bull case and a bear case to make for the discounter.

Wal-Mart said it now expects to earn between $4.08 and $4.12 a share during the holiday period, compared with prior guidance of $3.95 to $4.05 a share. It also beat third-quarter expectations, reporting a 9.3% jump in profit to $3.44 billion, or 95 cents a share versus Wall Street's estimates of 90 cents.

Market Ignores Wal-Mart Slow Sales

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Given this, it's not surprising that shares of Wal-Mart are advancing 2% to $55 in morning trading. "Considering the doom and gloom surrounding the company, all it was going to take was any inkling of brighter days to budge the stock, which has cooled a bit since the October investor day," Wall Street Strategies analyst Brian Sozzi, wrote in a note.

This upped outlook is definitely unexpected, especially with

Wal-Mart's pre-Black Friday price cuts

and the competitiveness across the sector this holiday season.

Other highlights from the quarter for Wal-Mart include improved operating margin due to U.S. and international expense leverage, while the significant amount of share repurchases suggest that management believes the stock is an attractive value.

Still, while Wal-Mart upped its earnings guidance, profit is being driven by its international business, which is offsetting continued weakness in the U.S. Domestic sales slumped 1.3%, marking its sixth consecutive quarterly decline.

While Wal-Mart management said it expects U.S. sales to turn positive in the fourth quarter, it is still leaving the door open for yet another negative period. Looking ahead, management is forecasting Wal-Mart U.S. same-store sales between down 1% and up 2%.

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Wal-Mart Chief Financial Officer Tom Schoewe said on a call with journalists that the sales guidance should be looked at from the mid-point of the range, which is in positive territory. "The 1% decline is more on the conservative side," he said.

But exactly why investors should believe this, remains to be seen.

Wal-Mart is currently in the process of unwinding mistakes it made over the past year. Through its Project Impact initiative, Wal-Mart removed hundreds of items from the shelves it deemed unprofitable and discontinued its "Action Alley," wide aisles filled with discount merchandise.

The initiative received significant backlash from shoppers, who complained that they were unable to find the items they wanted. As a result, Wal-Mart is now restocking some of these items and bringing back "Action Alley."

But bringing back this merchandise is not an overnight operation, meaning customer disappointment may linger.

Currently, Wal-Mart is nearing completion of fixing its food market, but Charles Holley, who was appointed CFO to replace Schoewe on Nov. 30, said correcting other categories like apparel will take time.

"We are not where we would like to be," Holley said, referring to merchandise assortment heading into the holiday season.

No doubt, these missteps will continue to weigh on sales until restocking is complete, but Holley said this is all factored into its revised outlook.

Janney Capital Markets analyst David Strasser isn't convinced U.S. sales will turn positive in the fourth quarter, as he maintains his outlook for a 0.5% decline during the period, citing continued weakness in apparel, home and general merchandise categories.

--Written by Jeanine Poggi in New York.

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