Sean Connolly
President and Chief Executive Officer at Conagra Brands
Thanks, Brian. Good morning, everyone and thank you for joining our second 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.
I'd like to start by giving you some context for the quarter. First, as you all know, the external environment has continued to be highly dynamic, but our team remain extremely agile in the quarter and executed the Conagra Way playbook. We navigated the ongoing complexity and delivered strong net sales growth anchored in elevated consumer demand that continue to exceed our ability to supply, inflation driven pricing actions and lower than expected elasticities.
While our net sales exceeded our expectations, margin pressure in the second quarter was also higher than expected, driven by three key factors: first, while we anticipated elevated inflation during the second quarter, it was higher than our forecast. Second we experienced some additional transitory supply chain costs related to the current environment. And third, in the face of elevated consumer demand that continue to outpace our ability to supply, we elected to make investments to service orders and maximize product availability for our consumers.
We expect margins to improve in the second half of the fiscal year as a result of the levers we pulled and continue to pull to manage the impact of inflation. We'll always look to our cost savings programs to offset input cost inflation. However, given the magnitude of the cost increases our actions also include additional inflation-driven pricing, we communicated pricing to customers again in December. For the year we're once again reaffirming our adjusted EPS outlook, but our path to achieve that guidance has evolved. We're increasing our organic net sales guidance based on stronger than expected consumer demand and lower than anticipated elasticities. We're also updating our margin guidance given the increase in our gross inflation expectations for the year and the timing of the related pricing actions.
Taken together, we continue to believe that elevated consumer demand coupled with additional pricing and cost savings actions will enable us to deliver adjusted diluted EPS of about $2.50. So with that as the backdrop, let's jump into the agenda for today's call. We'll start with an overview of the quarter before going into more detail on our outlook for the second half of the fiscal year. I'll also share some of our thoughts on the structural changes we're seeing in consumer behavior, particularly with younger consumers. We believe these changes are further evidence in the long-term potential of Conagra brand.
Let's dig into the quarter. As you can see on Slide seven, our team delivered solid Q2 results. On a two-year CAGAR basis organic net sales for the second quarter increased by more than 5% and adjusted EPS grew by nearly 1%. As I noted earlier, we delivered these results in the face of a highly dynamic and challenging operating environment. Input cost inflation came in higher than expected in the quarter.
In addition, we made some strategic decisions to service the heightened consumer demand we continue to experience as the entire industry incurred transitory costs associated with labor shortages, supply issues on material and transportation cost in congestion challenges during our Q2, we chose to invest in our supply chain and service orders. This deliberate decision ensured we could deliver food to our customers and consumers, especially during the holiday season.
Maintaining physical availability is an important part of building trust with customers and maintaining consumer loyalty. The bottom line is that a mid-supply disruption seen across the industry, we remained focused on building for the long-term. While the net result of these factors was a negative impact on our margins during the quarter, we're confident that our purposeful approach better positions our portfolio for the future.
I want to take this opportunity to thank our tremendous supply chain team. They've been resilient in navigating this environment, allowing us to remain agile and deliver for our customers and consumers. I continue to be impressed by our team's commitment and I'm grateful for their ongoing dedication.
Looking at Slide 10, you can see that our strong performance in the second quarter was broad-based, total Conagra retail sales were up 14.8% on a two-year basis in the quarter with double-digit growth in each of our domestic retail domains: frozen, snacks and staples. So penetration was also up this quarter building upon the significant number of new consumers we've acquired over the past two years. Total Conagra household penetration was up 59 basis points on a two-year basis and our category share increased 41 basis points.
In addition to increasing household penetration and acquiring new consumers, we are retaining our existing consumers as demonstrated by our repeat rates. Shoppers continue to discover our incredible product and their tremendous value proposition. As the chart on the right of Slide 11 shows our consumers keep coming back for more. As we execute our Conagra Way playbook innovation remained a key to our success across the portfolio in Q2. Slide 12 highlights the impact of our disciplined approach to delivering new products and modernizing our portfolio.
During the second quarter, our innovation outperformed the strong results we delivered in the year ago period. We continue to invest in new product quality and it's supporting our innovation launches with deeper, more meaningful consumer connections. Once again, our innovation rose to the top of the pack in several key categories, including snacks, sweet treats, sauces and marinades and frozen vegetables.
Slide 13, demonstrates how our ongoing investments in e-commerce continued to yield strong results. We again delivered strong quarterly growth in our $1 billion e-commerce business and e-commerce accounted for a larger percentage of our overall retail sales than our peers. We outpaced the entire total edible category in terms of e-commerce retail sales growth during the second quarter just as we did in the first quarter of 2022 and throughout fiscal 2021. As we mentioned earlier, our strong net sales growth was driven by elevated consumer demand, favorable elasticities, and inflation driven pricing actions.
On Slide 14, you can see the extent of our pricing actions in the first half of the fiscal year. During this period, our on-shelf prices rose across all three domestic retail domains. And as Dave will discuss shortly the pricing flowed through the P&L.
As you can see on Slide 15, price elasticity has been fairly low, it's been favorable to our expectations. Consumers continue to see the tremendous value of our products relative to other food options a concept they will elaborate on in a few minutes.
Now let's turn to the path ahead. You can see on Slide 17, we currently expect the gross inflation to be approximately 14% for fiscal 2022, compared to the approximately 11% we anticipated at the time of our first quarter call. This is a large increase and we're taking actions to offset the increase, while still investing in the long-term health of our business. Help manage our increasing inflation we're taking incremental pricing actions, including list price increases and modified merchandising plans. Many of these actions have already been announced to our customers.
As a reminder, there is a lag in timing between the impact of inflation and our ability to execute pricing adjustments based on that inflation. As a result the incremental price increases will go into effect in the second half of the year with the most significant impact during the fourth quarter. While it's easy to get caught up in the quarter-to-quarter impact of inflation and pricing, it's important to keep focused on the big picture. The long-term success of our business is driven by how consumers, particularly younger consumers respond to our products. And when you take a step back to evaluate the broader environment and how our portfolio delivers against the needs of the modern consumer, we believe that Conagra is uniquely positioned for the future.
As we've detailed many times before Conagra's on-trend portfolio filled with modern food attributes is winning with younger consumers and our confidence is underpinned by the many changes we're seeing in consumer behavior that are proving to be structural, especially given that these changes are driven by younger consumers that represent the most significant opportunity for long-term value creation. Younger consumers represent a large and growing part of the US population and they want to optimize the value that they get for the money they spend on food.
A large part of optimizing their food spending, includes shifting more dollars from eating away from home, eating at home. As they make that trade they're choosing national brands and we believe Conagra is ideally positioned to experience an outsized benefit from these behaviors given the relationship our brands are forming with younger consumers. Overall Conagra is delivering superior relative value to consumers, compared to both away from home options and store brands.
Let's take a closer look at these trends starting with the population changes. Slide 20, highlights the demographic shift underway in the US. Millennial and Gen Z consumers are large and growing cohort. These consumers are starting to settle down by homes and start families. As we presented in the past when people enter the family formation phase they increase the amount of food they eat at home, with an outsized increase in the consumption of frozen foods. And what we find particularly important about reaching Millennial and Gen Z consumers is that we believe they will remain more value focused than their predecessors.
First let's talk about the near-term. As you can see in the chart on the left Millennial and Gen Z consumers are earlier in their careers and earning less than the older generations of working age people. This is natural, but it bodes well for food at home trends in the shorter term. We believe that even as foodservice bounces back, younger consumers will be value conscious in their food choices. Fewer younger consumers are expected to achieve the financial success of the generations before them. The data on the right suggest that Millennials are more likely to earn less than their parents. We believe this means that these savi consumers will look to stretch their food dollars further even as they age.
The data also shows that younger consumers are already eating more at home, compared to the population as a whole Gen Z and Millennials have decreased restaurant visits more and sourced a larger percentage of their meals at home. If these younger consumers have made the shift at-home eating, the data shows that they are finding comfort in the quality, reliability and familiarity that national brands provide. We believe this makes a lot of sense, national brands provide value, while replicating many of the on-trend flavors and modern food attributes that consumers are used to experiencing in away from home dining. When consumers make trades like away from home to in-home eating trust is paramount.
In short national brands particularly modernized brands like those in our portfolio deliver on this trust imperative and that's because they offer superior relative value versus other food options. As consumers seek to stretch their household balance sheets in the face of broad-based inflation, one of the single largest levers available to them is the reduction in spending on food away from home as food away from home prices are typically over 3.5 times more expensive then food at home prices. This trade will likely become even more important for consumers as food away from home prices have already increased faster than at home prices in calendar 2021, and they are expected to increase at nearly twice the rate as at home prices in calendar year 2022.
Our aggressive modernization of the Conagra portfolio over the past several years has put us in a strong position to capitalize on these structural shifts. Our portfolio has shown its competitive advantage with excellent trial, depth of repeat, and share gain performance. Overall, we believe Conagra is well positioned to leverage these shifts to create meaningful value for shareholders.
And Slide 25 shows you the data to support our claim. Conagra is attracting more younger consumers than our peers and getting them to repeat at more attractive rates. By appealing to younger consumers now, we're building superior consumer lifetime value. Importantly, the data shows that these new younger buyers are stickier across our portfolio. We believe this comes back to the investments we've made and continue to make in our products and our brands. The Conagra Way has positioned us to win.
As I discussed earlier we are reaffirming our adjusted EPS guidance of approximately $2.50 for the full-year with a few updates on how we expect to get there. We're increasing our organic net sales guidance to be approximately plus 3%, up from approximately 1%. We're slightly adjusting our adjusted operating margin guidance to approximately 15.5% down from approximately 16% and we're updating our gross inflation guidance to about 14%, up from approximately 11%.
Now that I have highlighted our performance for the quarter and strong positioning for the future, I'll turn it over to Dave to provide more detail on our financial performance.
