IMHO, I can't see that having a LQS in the area would seriously hurt Wal-Mart's fabric business. They don't sell the same merchandise, and they definitely have different price points! A place like JoAnns probably does provide competition.
I think it must depend on the volume of sales that the fabric/craft department in a particular store generates, that depends on whether they will still keep the fabrics when they remodel the store.
It's probably all about the bottom line. If they can make more money with that floor space, selling something *other* than fabric, then that's what they will do.