Leanne Cunningham
Senior Vice President, Shareholder Relations Officer at Brown-Forman
Thank you. Lawson and good morning everyone. As Lawson reviewed our headlines for the first half. I will provide additional details on our business results and our outlook for fiscal 2022 starting with the top line. Reported net sales were up 9% in the first half of the fiscal year compared to the same period in the prior fiscal year. This growth was driven by favorable price mix, higher volumes and the positive effect of foreign exchange, partly offset by an estimated net decrease in distributor inventories and the effect of the sale of Early Times, Canadian Mist and Collingwood brands during the first half of fiscal 2021.
The decrease in distributor inventory is primarily due to the supply chain disruptions Lawson mentioned and that I'll address in more detail momentarily. From an underlying net sales growth perspective, we experienced broad-based growth across all of our geographic clusters of the U.S., developed international markets and emerging markets, as well as our Travel Retail channel.
Starting with the U.S. business, which represents approximately half of our underlying net sales, for the first half of fiscal 2022, underlying net sales grew 6% due to higher volumes, as well as positive size and channel mix, Jack Daniel's Tennessee Whiskey was the largest contributor to growth, fueled by higher volumes and a favorable channel mix shift with the reopening of the on-premise channel.
Recent trends observed by mobility and OpenTable reflect a stabilization in the on-premise channel just below their pre-pandemic levels. Consumer premiumization trends continue to propel our premium bourbons led by Woodford Reserve and Old Forester, both with their strong double-digit underlying growth rates, along with strong consumer demand for our tequila brands, resulted in higher volumes of Herradura and el Jimador. This growth was partially offset by lower volumes in the off-premise channel due to strong prior-year comparisons.
Supply chain disruptions, particularly for the Jack Daniel's Flavors and Woodford Reserve also had an adverse effect on our first half results and reduced inventory levels. These disruptions impacted our finished goods inventories, along with inventories at our distributors and retailers. In the e-premise channel, our market share remained slightly above 2% and well above pre-pandemic levels even as the on-premise channel reopened and consumers began to return to in-store shopping.
Developed international markets collectively delivered strong underlying net sales growth up double digits in the first half with broad-based growth across the markets despite supply chain challenges. This growth was largely driven by the reopening of the on-premise as well as a rebound of tourism in some markets. The Jack Daniel's family of brands experienced strong growth driven by Jack Daniel's Tennessee Whiskey high single-digit volume growth led by markets such as Germany and the U.K. where the brand is gaining share. The brand also grew in Spain as tourism returns and Korea where whiskey consumption shifted to international brands.
Jack Daniel's ready to drink experienced strong volume growth in Germany, where we continue to be a category leader and the U.K. These gains were partially offset by lower volumes in Australia due to strong prior-year comparisons. Jack Daniel's Tennessee Honey grew volume double digits fueled by gains in France, Czechia and Korea, and collectively the Jack Daniel's super premium brands Gentleman Jack and Jack Daniel's Single Barrel grew volume low-single digits as they were significantly impacted by supply chain challenges.
In addition to the Jack Daniel's family, collectively our super premium brands delivered very strong double-digit underlying net sales growth. As Lawson mentioned, we continue to invest in these brands through our emerging brands group in Europe. Collectively, our emerging markets continue to rebound against easier comparisons with strong double-digit underlying net sales growth, driven by the growth of Jack Daniel's Tennessee Whiskey in Turkey, Brazil and Chile.
They continued launch of Jack Daniel's Apple, most notably in Brazil and Chile and collectively our full strength tequila brands grew double-digits in Mexico as the down-trading trend shifted back towards premiumization, which more than offset the strong prior-year comparisons of New Mix RTDs. While New Mix is down year-over-year, the brand is performing above its pre-pandemic levels.
And from an innovation perspective, we continue to innovate in the RTD category and recently launched el Jimador Seltzer in Mexico in October. Finally, our Travel Retail business continue to experience a strong rebound as we cycled against significant declines during the early days of the pandemic. Volumes continue to remain below their pre-pandemic levels as international airline travel and the cruise business have not fully recovered.
Moving onto gross profit and gross margin. In the first half of the fiscal year, reported gross profit increased 9% with underlying growth of 12% in line with our underlying top line growth and gross margin was down 10 basis points year-over-year. This represents an improvement in gross margin in the second quarter compared to the same period last year. Consistent with last quarter, we continue to navigate the impacts of global supply chain disruptions and input cost headwinds.
As we shared last quarter, our supply chain disruptions have largely been driven by glass supply constraints. While glass supply constraints have eased in the second quarter, they resulted in a decrease in our finished goods inventory, along with the inventories at both the distributor and retailer. These challenges have had a negative impact on our price mix in the first half of this fiscal year due to unfavorable product mix on our higher-margin brands including the Jack Daniel's family of brands as well as Woodford Reserve.
And similar to many other CPG companies, we have also experienced higher than expected logistics cost. The input cost headwinds related to agave and commodity prices, largely grain and aluminum, also continued throughout the first half of the year. Consistent with our last call, greater demand of our tequila brands, driven by the continued growth in the U.S. and a faster than expected rebound in Mexico has required a greater supply of agave. As a reminder, agave costs are below their peak, though easing at a slower pace than expected due to the higher demand within the category.
Turning to our operating expenses. We continue to support our top line momentum through our investments behind our iconic brands and our people. Our reported advertising expense increased 24% and on an underlying basis grew 23% in the first half as we lap the impact of the early stages of the pandemic when on-premise activations, consumer events, summer festivals and sponsorships were rescheduled or canceled.
Reported SG&A expenses increased 10% with underlying growth of 8%, driven by the timing of compensation related expenses, non-income tax items and the cycling of lower discretionary spend during the same period last year due to COVID-19. In total, on a reported basis, operating income decreased 15%, largely driven by the effect of acquisitions and divestitures, primarily the gain on the sale of Early Times, Canadian Mist and Collingwood brands last year and the decrease in distributor inventories. And on an underlying basis, operating income grew 13% for the first half. The decrease in reported operating income combined with an increase in our effective tax rate resulted in a 24% decrease in diluted EPS to $0.89 per share.
And finally to our fiscal 2022 outlook. Even with the volatility and potential resurgence of COVID-19 due to emerging variants, we remain confident in our top line growth momentum based on the continuing performance of our U.S. business, the collective strength of our developed markets, which performed well throughout the pandemic in the off-premise channel and should continue to benefit from the reopening of the on-premise channel and increasing levels in tourism.
In the aggregate, we still expect strong growth in our emerging international markets, as well as Travel Retail as we cycle the effect of easier comparisons and they continue their path to recovery. And further. We do not expect our non-core business mainly used barrel sales to have a material impact on our results this year. We also believe our portfolio remains well positioned to continue to benefit from growing premiumization trends.
Additionally, as we mentioned last quarter, given the strength of our brands, we are able to focus on value growth through revenue growth management initiatives and have increased price on a number of our brands in the U.S., including Jack Daniel's. We believe our ability to take price reflects the health and the investments we are making behind our brands as well as a more favorable pricing environment. Based on our strong results in the first half of the fiscal year, coupled with solid consumer takeaway trends, we now expect underlying net sales to grow in the high single-digit range.
Turning to gross margin. We continue to manage through the unfavorable impact of global supply chain disruptions and have deployed a number of risk mitigation strategies to address the various constraints on our business. While we expect these disruptions to continue throughout the remainder of the fiscal year, we believe the impact will become less significant in the second half of the year. We believe this along with persistent cost headwinds related to agave, logistics cost and commodity prices will continue to have a negative impact on our gross margin.
We also believe we will have a modest impact from the removal of tariffs in the EU. The tariffs are scheduled to end on January 1, 2022. Therefore, the impact to the full year fiscal 2022 will be minimal, but it will be a tailwind. As a result of these factors, we still expect gross margin for the fiscal year to be flat or slightly down.
The spirits category continues to take share from beer and wine and we will continue to invest behind our brands to ensure we optimize our opportunity to gain share in the market. We expect underlying advertising expense to be in line with top line growth, which is consistent with our long-term philosophy. We also remain committed to supporting our various strategic initiatives including our three new RTCs of Russia, Belgium and Taiwan, the continued expansion of our emerging brands team in select international markets and the increased investment in our digital marketing and e-commerce capabilities.
Therefore, we now expect our underlying operating expenses, advertising and SG&A to be in the high single-digit range. And we now expect our underlying operating income to grow in the high single-digit range in line to slightly below underlying net sales growth. Lastly, we continue to expect our fiscal 2022 effective tax rate to be in the range of about 22% to 23%. As a reminder, the seasonality of our results are expected to be volatile for the remainder of the year, particularly our operating income as a result of unusual comparisons in our prior year.
Before I conclude my remarks, I wanted to briefly highlight our longstanding capital allocation philosophy that has produced strong results for our investors and allowed us to maintain a healthy balance sheet. As I shared during our Investor Day in September, our four guiding principles are: first to fully invest behind our business, second to pay increasing regular dividends, third to opportunistically look for acquisitions that we believe create long-term value, and finally to seek opportunities to return cash to shareholders in excess of regular dividends.
Throughout the pandemic, we thoughtfully and judiciously prioritized, managed and allocated capital and emerged with an even stronger balance sheet. As we announced on November 18th, the Brown-Forman's Board of Directors approved a 5% increase in the regular quarterly cash dividend. We are proud to be a member of the prestigious S&P 500 Dividend Aristocrats Index having paid regular quarterly cash dividends for 78 consecutive years and increased the regular dividend for 38 consecutive years.
In addition, Brown-Forman's Board of Directors declared a special cash dividend of $1 per share or approximately $480 million on our Class A and Class B common stock. We firmly believe our capital allocation philosophy, coupled with our strategic priorities, will continue to drive superior returns over the long term. In summary, we are pleased with the strong first half of the fiscal year. We are able to share these results today because of the strength of our brands and the commitment of our people, the strong and talented spirits that make up Brown-Forman.
Over the last 20 months, our employees around the world have demonstrated the same high level of agility and resilience that we've seen exemplified throughout the course of our 151-year history. They have shown us once again that we can continue to build our brands, achieve our strategic ambitions and thrive in the long term even under challenging conditions, all it requires is determination, perseverance and a commitment to ensuring there is nothing better in the market than Brown-Forman.
This concludes our prepared remarks. Please open the line for questions.
