At the end of the first Mario Galaxy, Rosalina and her Lumas managed to save the universe, basically by creating a Big Crunch and rebuilding the entire thing from scratch. Mario and most of the characters he encountered in his quest are "reanimated" in a freshly-created Mushroom Kingdom, itself part of a grand, unified Galaxy. However, Super Mario Galaxy 2 can't be a direct sequel to this, since the Star Festival happens once in a hundred years, and Mario is still kicking around, not a day older. So, the game is set in an alternate universe concurrent with the events of the first game, to be "merged" into a single timeline following the events of the second game. In other words, yes, Super Mario freakin' Bros now has a split timeline theory.