Mercedes-Benz lowers margin goal for cars division after earnings drop

Mercedes-Benz Group lowered the ceiling for a key profitability target and flagged a tough Chinese market and trade tensions, but predicted a sunnier second half of the year.

The German luxury-car maker said Friday that second-quarter net profit and revenue fell on year for the group after fewer sales and a drop in more profitable top-end vehicles. While revenue trailed forecasts, net profit rose above them.

Mercedes now expects a yearly adjusted return on sales of between 10% and 11% in its cars division after previously projecting a margin of between 10%-12%.

Still, the car division’s 10.2% margin for the quarter eked past its quarterly goal—though it was down from 13.5% a year prior. The company chalked up the performance to operational efficiency, low material costs and a favorable sales mix.

Against talk of a possible profit warning, the results were relieving, Bernstein analysts said in a note.

Citi analysts had pegged the margin at 10.4% and flagged the company’s soft sales.

“Overall, MBG execution has recovered, but overall sales and top end sales mix have remained weak." Citi analysts said in a note.

The company backed its full-year outlook at the group level, citing launches of new models and forecasting top-end vehicle sales.

But it also noted macroeconomic uncertainty. Its view on China, where it faces brawny competition from local carmakers in its entry-level and core segments, is cautious, Mercedes said. It also pointed to geopolitical issues and trade tensions between Europe, China and the U.S. that could weigh on future results.

Mercedes raised its annual margin outlook for the vans division, which benefited from favorable pricing and cost reductions during the quarter, it said. It now expects the business’s adjusted return on sales to hit 14%-15% compared with 12-14% originally.

But the premium vehicle maker cut the mobility business’s outlook, blaming ramp-up costs for charging infrastructure and a challenging market in China. It cut its expectation for adjusted return on equity to 8.5%-9.5% from 10%-12%, adding that it will focus on cost efficiency.

Group net profit fell to 3.02 billion euros ($3.28 billion) from €3.56 billion in the second quarter last year. It beat analyst expectations of €2.95 billion, according to the Visible Alpha consensus.

Revenue fell to €36.74 billion from €38.24 billion, behind the Visible Alpha forecast of €37.06 billion. Industrial free cash flow dropped to €1.63 billion from €3.36 billion.

Earnings before interest and taxes came in at €4.04 billion, compared with €4.99 billion the year prior and slightly below with the Visible Alpha consensus of €4.06 billion.

Write to David Sachs at david.sachs@wsj.com