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 17.2% in the trailing 12 months ended Aug. 4, 2007, from 18.9% a year earlier because of lack of sales leverage, lower merchandise margins, higher advertising expenses, and investments in growth strategies and store experience. In the near term, margins will likely expand because of its cost-reduction program. Management's revised merchandise
