The ratings on San Francisco, Calif.-based The Gap Inc. reflect the company's strong business position in casual apparel, its geographic diversity, and strong cash flow. These factors are tempered by management's challenge of continuing to improve the business position of its three brands in an industry that is intensely competitive. Management's initiatives to improve product quality and assortment, store execution, and inventory management, as well as the rationalization of its store base, have resulted in a significantly improved operating performance. The Gap's trailing 12-month operating margin of 21% is significantly above its low of 14% in 2000, despite negative sales trends since June 2004. Return on permanent capital is a healthy 22%. Standard & Poor's Ratings Services believes that the
