The ratings on The Gap Inc. reflect management's challenge to improve business fundamentals in its three brands in an industry that will continue to experience intense competition, and to improve its weakened credit protection measures. These factors are partially offset by the company's strong business position in casual apparel, its geographic diversity, and strong cash flow before capital expenditures. The Gap's operating performance has been poor for the past three years. Operating margins improved to 18.2% in 2002 from a weak 14% in 2001 and return on permanent capital increased to 14.7% from 8.4% during the same period. The company's 2000 margin of 19.9% compares unfavorably with the 1999 margin of 24.1%. The margin improvement in 2002 was attributable to
