Ratings on San Francisco-based The Gap Inc. reflect management's challenge in improving the business fundamentals of its three brands in an intensely competitive industry, and in strengthening credit protection measures. These factors are partially offset by the company's good market position in casual apparel, its geographic diversity, and strong cash flow. The Gap's operating performance has been on a decline for the past two years. Operating margins declined to 18.3% in the 12 months ended Oct. 28, 2006, from 21% a year earlier. In 2005, the margin fell to 20.8% from 22.4% in 2004 due to lack of sales leverage, lower merchandise margins, higher advertising expenses, and investments in growth strategies and store experience. Management's revised merchandise and marketing initiatives
