What: Shares of modular carpet company Interface Inc. (NASDAQ:TILE) slumped on Friday following the news that the United Kingdom would exit the European Union. Interface has a significant exposure to both Europe and the United Kingdom, leading investors to drive the stock down 12% by 11:15 a.m. EDT.
So what: In fiscal 2015, Interface derived 26% of its revenue from Europe, with its key markets in the region being the U.K., Ireland, and Germany. The success of the Brexit referendum on Thursday has thrown global financial markets into a state of turmoil, with the British pound suffering a steep decline.
Interface's most recent annual report includes the Brexit referendum as a risk factor. According to Interface, the U.K.'s decision to leave the European Union could have major negative consequences for the company:
In addition, in June 2016, a referendum will take place in the U.K. as to whether or not the U.K. should remain a member of the European Union. In the event of a decision by the U.K. to exit the European Union, there could be a detrimental effect on the value of either or both of the Euro and the British Pound Sterling, which could negatively impact our business (principally from the translation of sales and earnings in those foreign currencies into our reporting currency of U.S. dollars). Such a development could have other unpredictable adverse effects, including a material adverse effect on demand for office space and our carpet products in Europe if a U.K. exit leads to economic difficulties in Europe.
Now what: Given that the decision by the U.K. to exit the European Union is an event without precedent, predictions about the consequences are little more than speculation. The British pound is currently at its weakest relative to the dollar since 1985, and that will certainly create short-term volatility in Interface's results. But in the long run, it's difficult to say. With panic the theme of the day, Interface stock is getting hammered.