Ratings on San Francisco-based The Gap Inc. reflect the challenge to management to improve the business fundamentals of its three brands in an intensely competitive industry and to strengthen credit-protection measures. These factors are partially offset by the company's good market position in casual apparel, 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 full year 2005, the margin fell to 20.8% from 22.4% in full year 2004, because of lack of sales leverage, lower merchandise margins, higher advertising expenses, and investments in growth strategies and store experience. Management's revised
