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Traders see further decline ahead for Abercrombie & Fitch

The ETF that tracks the retail sector, the XRT, has fallen 8 percent in the last month as earnings in the space continue to disappoint. But traders are betting that one beaten down fashion retailer, Abercrombie & Fitch, is about to take another leg lower.

In a sizable group of trades on Thursday, traders bet nearly $200,000 that shares of Abercrombie & Fitch (ANF) will fall 10 percent in the next three weeks. In this group of wagers, traders bought 5,500 of the June 19-strike puts for $0.35 per share (or $35 each). Traders' negative sentiment around Abercrombie & Fitch continued on Friday, with more than 11,500 of the June 19-strike put contracts trading. To the extent these puts are being bought, they represent bets that the stock will fall below $19 within the next month.

Options expert Mike Khouw notes that a lot of options activity post-earnings is not what struck him as unusual — it's the magnitude of opening positions in the June 19 puts that was more peculiar.

The Street remains ultra-bearish on the name, with analysts now expecting year-over-year quarterly results by the second quarter of 2017 that are significantly lower than the last, according to Khouw.

"This is a declining story," he said, pointing out that Abercrombie & Fitch has seen massive declines in both earnings per share and revenue since 2011. And Khouw says foot traffic internationally is to blame.

"[Foot traffic] represents about 35 percent of their revenue," said Khouw. "The only bright spot is direct-to-consumer, which represents probably 25 percent of their revenue. Overall, it's a pretty grim picture."

For that reason, the high volume of bullish bets on the stock may make sense.

"Trading at ~16.7x forward earnings and indicating that the next quarter will also be weak, it's hard to see why even if one was going to bet on a traffic turnaround, one wouldn't look for a cheaper place to do it," he wrote to CNBC.

The stock's shares are already down nearly 30 percent in the last month.

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