The rating on San Francisco-based Gap Inc. (Gap) reflects Standard&Poor's Ratings Services' expectation that operating performance will remain relatively stable in 2011 and that credit measures will remain above average for the rating. However, we believe margins will be under pressure this year, as the negative effects of meaningfully higher cotton costs will more than offset improved fixed-cost leverage from modestly higher international and online sales. We also expect Gap to maintain a somewhat more aggressive, but still moderate, financial policy. We view Gap's business risk profile as fair. It reflects the intensely competitive nature of apparel retailing, especially as it relates to management's ability to improve the business fundamentals of its three brands in the coming years.
