November 6, 2017 / 5:32 AM / a year ago

UPDATE 2-Subaru dials back profit targets as U.S. car sales sputter

* Q2 operating profit 92.8 bln yen, vs 113.8 bln yen consensus

* Subaru Q2 U.S. sales drop 7.3 pct y/y, 1st such drop since 2011

* Subaru cuts full-year U.S. vehicle sales forecast

* Sees 10 bln yen costs related to improper final inspection (Adds U.S. sales milestone, CEO comment, other details)

By Naomi Tajitsu

TOKYO, Nov 6 (Reuters) - Subaru Corp's U.S. sales have started losing steam, after having previously outpaced its bigger Japanese rivals, forcing the automaker to turn in a disappointing quarter and lower its profit outlook for the full year.

Subaru had been outperforming in the key U.S. market partly due to an unusual strategy of marketing its cars as lifestyle products, rather than high-performing machines. But in the quarter ended September, its U.S. sales dropped from year-ago levels for the first time in six years, indicating competition and discounting were beginning to take a toll.

Lowering the automaker's annual U.S. sales estimate, CEO Yoshiyasu Yoshinaga told reporters at a briefing on Monday that the company was loathe to hand out more incentives as a means to attract buyers and maintain its initial sales forecast.

"Increasing incentives just to boost sales would go counter to our business model," he said on Monday. "We want to continue be able to meet our goals in a healthy manner."

Industry experts estimate incentives on Subaru's Legacy sedan and the top-selling Outback SUV crossover had climbed around 20 percent in the past year in the United States, ramping up the company's costs in what is its biggest market.

For the second quarter, Subaru sold around 159,000 vehicles in the United States, down 7.3 percent from a year ago, its first such decline since July-September 2011. In Japan, Subaru's No.2 market, sales rose around 13.5 percent over the period.

Subaru said it expects U.S. vehicle sales, which account for nearly two-thirds of its global sales, to come in at around 668,000 in the year to March, around 3 percent lower than a prior forecast but a touch higher than a year ago.

It pegged operating profit for the year at 380 billion yen ($3.33 billion), versus a prior forecast of 410 billion yen and lower than 410.8 billion yen a year ago.

The company also lowered its annual net profit projection to 207.0 billion yen, from 228.5 billion yen.

The automaker said it was preparing for a negative impact of 10 billion yen for the year due to costs related to its improper final inspection procedures, which it expects will result in vehicle recalls in the domestic market.

Last month, Subaru said it had failed to follow proper procedures when doing final checks for vehicles made in Japan for the domestic market for around 30 years, following a similar discovery at rival Nissan Motor Co.

For the second quarter, Subaru reported a 13.2 percent drop in operating profit to 92.8 billion yen. This was lower than a mean forecast for 113.8 billion yen from nine analysts polled by Thomson Reuters I/B/E/S. ($1 = 114.2200 yen) (Reporting by Naomi Tajitsu; Editing by Himani Sarkar)

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