Conagra Brands Inc.

Our 2022 forecast incorporates a 120-basis-point gross profit margin percentage decline, which contributes to our $170 million projected gross profit deterioration. As a result, adjusted leverage is expected to reach 4x as of May 31, 2022, compared to 3.8x as of May 31, 2021. Our projected leverage ratio is about 12% below our downgrade credit ratio trigger (adjusted leverage sustained above 4.5x). We assume Conagra will prudently manage share repurchases to remain below our downgrade trigger. This cushion could diminish if inflation remains very high, if volumes fall more than expected due to escalating competition, or if there are significant supply chain inefficiencies. If adjusted leverage were to exceed 4.5x, we would need to assess the cause of the deterioration

...We assume Conagra Brands Inc. will successfully mitigate very high inflation with only moderate credit ratio weakening by fiscal year-end May 31, 2022. Conagra hiked its inflation expectation for fiscal 2022 to 9% from 6% a few months ago. This difference equates to about a $255 million cost increase (compared to $2.4 billion S&P Global Ratings-adjusted EBITDA for fiscal 2021). Most of the incremental inflation is coming from edible fats and oils, proteins, packaging, and transportation. Conagra assumes the inflation pressure will be most pronounced in the first half of the fiscal year, with moderation in the second half. We believe the company has sought price increases with retailers; in our opinion, given the widespread prevalence of inflation across the U.S. economy, Conagra should be successful realizing much of its pricing initiatives. However, profitability in the first quarter ending August 2021 is likely to be very weak given the time lag between the cost increase and price realization....

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