Sean Connolly
President and Chief Executive Officer at Conagra Brands
Thanks, Brian. Good morning, everyone, and thank you for joining our first quarter fiscal 2022 earnings call. Today, Dave and I will discuss our results for the quarter, our updated outlook for the remainder of the year and why we believe that Conagra continues to be well positioned for the future.
Slide 5 lays out our key messages for today. First, as everyone is aware, the external environment is incredibly dynamic right now, and we see many of these challenges persisting. But despite the complex operating situation, the ongoing dedication, resilience and agility of our team enabled us to deliver solid Q1 results on the back of strong sales.
We continue to benefit from our proven approach to brand building and the breadth of investments we're making to increase consumer demand. These efforts drive brand health, which is evidenced by the continued strength of our sales, share and repeat rates across the portfolio. As a result, we believe our brands are well positioned to continue managing through the current inflationary challenges and support ongoing inflation-justified pricing actions.
Looking ahead, we're reaffirming our EPS outlook for the year. However, we now see a slightly different path to achieving that EPS. We expect inflation to be higher than originally forecasted, but we also see continued strength in consumer demand even above our original expectations. We believe that consumer demand, coupled with additional pricing and cost-saving actions will enable us to deliver adjusted diluted EPS of about $2.50. So with that as the backdrop, let's jump right in.
We know that our long-term performance is a function of the caliber and engagement of our team, and that has never been more true than today. I'm extremely proud of the team's resilience and agility in adapting to the dynamic environment we're currently experiencing. As a result of our team's continued hard work and dedication, we've been able to successfully execute through sustained elevated demand and challenging supply conditions.
First, as we've already mentioned, consumer demand has remained at higher levels than we expected due to macro forces as well as the unique position of our portfolio. This is a great problem to have, but it increases the demands on our supply chain at a time when the industry is navigating labor shortages, material supply issues and transportation cost and congestion challenges.
Taken together, these factors created an upper control limit on the amount of product we could produce and ship in Q1. If we had the capacity to meet all of the demand, our numbers would likely have been even more impressive. However, our ability to deliver solid results amid this dynamic environment is a testament to our team's ongoing commitment to executing the Conagra Way playbook each and every day.
The Conagra Way playbook to portfolio modernization remains our North Star in any operating environment. Regardless of the external factors that may influence short-term demand and supply dynamics in any given quarter, we define long-term success as creating meaningful and lasting connections between consumers and our brands. We believe that our playbook is the most effective framework for delivering on that objective.
Those of you who have followed us for a while will recall that our modern approach to brand building is more comprehensive than legacy industry practices. Instead of anchoring our brand building predominantly in broadcast advertising that pushes new messages on old products, we anchor our investments and our efforts first in developing new modern and superior items. Then, once we've created these more modern and provocative products, we invest to drive the physical availability of those items in-store and online. And finally, our investments to drive meaningful one-to-one communication to the right consumers at the right time, at the right place, enable us to remain salient and relevant.
This comprehensive approach and unwavering commitment to modernizing and premiumizing our portfolio continues to pay off and enables us to better manage our brands within any environment.
And as you can see on Slide 8, our team delivered solid results during the first quarter. As you know, our year-over-year growth rates were impacted by the elevated demand we experienced during the first quarter of fiscal 2021 when we were still in the early months of the pandemic. Given this dynamic, we'll reference some two-year figures throughout today's presentation to provide more helpful context of what we believe is the underlying strength and trajectory of the business.
As you can see, on a two-year CAGR basis, organic net sales for the first quarter increased 7% and adjusted EPS grew by nearly 8%. Importantly, our solid performance in the first quarter was broad based.
Just take a look at Slide 9. Total Conagra weighted dollar share grew 0.8 points on a two-year basis in the quarter with share gains in each of our domestic retail domains, frozen, snacks and staples. Innovation remained a key to our success across the portfolio in Q1.
Slide 10 highlights the impact of our disciplined approach to delivering new products and modernizing our portfolio. During the first quarter, our innovation outperformed the strong results we delivered in the year ago period. This reflects not only the quality of the products launched, but also our efforts to support those launches with investments and capabilities that deliver deeper, more meaningful consumer connections. And as you can see, our innovation rose to the top of the pack in several key categories, including snacks, sweet treats, frozen vegetables and frozen meals.
Our performance is a clear testament to the innovation and marketing engine at Conagra, and we believe the solid reputation we've built with customers and consumers. In addition to developing superior products, we also remain focused on physical availability during the first quarter through both brick and mortar and online.
Slide 11 demonstrates how our ongoing investments in e-commerce continued to yield strong results. Once again, we delivered quarterly growth in our $1 billion e-commerce business, both against our peers and as a percentage of our overall retail sales. We outpaced the entire total edible category in terms of e-commerce retail sales growth during the first quarter, just as we did throughout fiscal 2021.
E-commerce sales now represent more than 9% of our total retail sales, more than double what they were just two years ago. As we mentioned earlier, our solid top line performance during the first quarter was driven by strong demand, robust brand-building investments and inflation-justified pricing actions.
Slide 12 details the extent of our pricing actions to date. A few key points to keep in mind. First, we began implementing actions on some of our domestic retail products in the fourth quarter of fiscal 2021 in response to the inflation we began to experience last fiscal year. The majority of our domestic retail pricing actions, however, just started to hit the market at the end of Q1 in response to the inflation we spoke to you about on our Q4 earnings call in July. As a result, the benefit in the quarter is less than what we expect to see going forward.
You can see this playing out in the consumption data from the last four weeks, all of which are part of our fiscal second quarter. During this period, our on-shelf prices rose across all three domestic retail domains. Looking ahead, our original plans for the year included additional inflation-justified pricing in future periods.
Given the heightened inflationary environment, however, we now expect to take incremental actions beyond those original plans. Many of these actions have already been communicated to our customers and the benefits will be weighted toward the second half of the fiscal year. We'll keep you apprised, but it's important that we stress that our pricing actions are not a blunt instrument. We take a fact-based approach to pricing within the portfolio. We use a data-driven approach to elasticities and thoughtfully execute actions to align with customer windows.
As we look ahead, we remain confident in the fiscal 2022 EPS guidance we outlined on the fourth quarter call, but we now expect to take a different path to achieving that guidance. As mentioned, we now expect inflation to be higher than originally forecasted. However, we believe that the combination of continued strength in consumer demand, incremental inflation-justified pricing and additional cost savings actions will enable us to offset the impact of that inflation.
I'd like to briefly unpack these factors, starting with the update to our inflation expectations.
As you can see on Slide 14, we currently expect gross inflation to be approximately 11% for fiscal 2022 compared to the approximately 9% we anticipated at the time of our fourth quarter call. The bulk of the incremental inflation can be attributed to continued increases in the cost of proteins, edible fats and oils, grains and steel cans since our Q4 call.
I want to emphasize that this is our best current estimate of gross inflation for the full year and does not account for the impact of supply chain productivity improvements or hedging. Dave will provide more color on inflation and the various levers we're able to pull to help offset its impact.
Even in the face of this acutely inflationary environment, we remain squarely focused on continuing to invest in our brands and capturing the strong consumer demand. And we're pleased to share that the consumer demand we experienced during the first quarter exceeded our prior expectations.
As you can see on Slide 15, our total company retail sales on a two-year CAGR basis were up nearly 7% in the first quarter with strong growth across our frozen, snacks and staples domains. And when you peel back the onion further you find even more evidence to underscore the durable strength of our top line performance.
The chart on the left side of Slide 16 demonstrates that we continue to grow our household penetration during the first quarter, building upon the significant new consumer acquisition we've achieved over the past year-and-half. But what I believe is even more encouraging is the chart on the right.
We didn't just acquire new consumers, we kept them. The data shows growth in repeat rates that demonstrates our new consumers discovered the incredible products and tremendous value proposition of our portfolio. We're proud that our products are resonating with consumers and that those shoppers keep coming back for more. Importantly, our performance on these metrics, household penetration and repeat rates has not only been strong in the absolute but relative to the competition as well. We're also encouraged by the elasticity of demand for our portfolio, which has been better than previously expected.
Slide 17 demonstrates that our pricing actions to date have had limited impact on demand. As I mentioned, most of our pricing actions taken to date began to appear on shelf at the end of Q1. And you can see how that dynamic is being reflected in the data for September, which is part of our second quarter.
We continue to be cautiously optimistic that our elasticities will remain favorable as the full array of pricing enters the market. As evidenced by our strong penetration and repeat rates, a growing number of consumers have clearly discovered the convenience and value that our retail portfolio provides.
Taken together, the net result of these factors I just detailed is the reaffirmation of our EPS guidance and margin and a few updates on how we expect to get there. We're increasing our organic net sales guidance to be approximately plus 1% up from approximately flat at the time of our Q4 call. We are reaffirming our adjusted operating margin guidance to remain at approximately 16%. We're updating our gross inflation guidance to about 11%, and we are reaffirming our adjusted EPS guidance of approximately $2.50.
Before I turn the call over to Dave, I want to briefly reinforce some of the longer-term tailwinds we believe will benefit us for years to come. This includes enduring trends that predate the COVID-19 pandemic and new consumer behaviors adopted over the past 18 months.
As a reminder, we have a proven track record of successfully attracting Millennial and Gen Z consumers at a higher rate than our categories as a whole. By attracting younger consumers now we create the groundwork for future growth. Not only do these younger generations offer the opportunity to drive lifetime value, they're larger than the Gen X generation that immediately preceded them.
Historically, younger adults have eaten at home less than older generations. The meaningful shift toward at-home eating tends to happen during the family formation years. In particular, we know that annual frozen category spend per buyer increases in households with young kids, and it increases further as the kids grow up. Importantly, almost half of Millennials have yet to begin having kids, and we fully expect their consumption of Conagra products will grow along with the growth of their families.
Another enduring trend is the growth of snacking, which has long been the fastest-growing occasion in food and shows no signs of slowing down. We have a very strong $2 billion ready-to-eat snacks business that spans multiple subcategories where we either have the fastest-growing brand, the largest brand or both. The COVID-19 pandemic has only served to accelerate these existing trends and create additional long-term growth drivers.
One of the primary drivers for more at-home eating is the shifting workplace dynamics that are meaningfully changing weekday eating behavior. This includes both the contracting workforce and the rise of remote work. As more people work from home or exit the workforce, the more likely these people are to eat at home, particularly on weekdays. Importantly, some aspects of remote workforce adoption are expected to be permanent. The way we work is changing and that's driving changes in consumer eating habits as well.
More time at home also means more time devoted to preparing meals. Younger consumers are acquiring new skills and developing new food habits at a formative age. The behavioral science tells us that when people learn to cook at an early age, they continue to cook at elevated levels as they get older, and consumers of all ages are rediscovering their kitchens and cooking more at home. Across all these long-term tailwinds, we believe our portfolio is uniquely positioned to meet the needs of today's consumers.
Our Frozen portfolio offers hyper convenient meals and sides perfect for the quick work lunch or family dinner. Our Snacks and Sweet Treats portfolio caters to those looking to experience bold, anytime flavors at home while enjoying time with friends and family. And our Staples portfolio offers the simple cooking aids and meal enhancers that both experienced and first-time cooks are seeking.
In summary, Conagra's portfolio has delivered against the recent behavioral shift better than the competition. And as we move beyond the pandemic and Millennials and Gen Z's continue to age, we believe that our brands are well positioned to become an even more regular part of their routines.
Now that I've highlighted our performance for the quarter and strong positioning for the future, I'll turn it over to Dave to provide more detail.
