The ratings on San Francisco-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 improving the business position of its three brands in an industry that is intensely competitive and its ongoing merchandising issues. Management's initiatives to improve product quality and assortment, store execution, and inventory management, as well as the rationalization of its store base, resulted in significantly improved operating performance from 2002 to 2004. However, the company's operating margin fell to 20.4% in the 12 months ended May 3, 2006, from 21.7% in the year-ago period due to lack of sales leverage, lower merchandise margins, and investments in growth strategies
