The Rising Cost of Retail: Who Will Win?

Card said during the company's first-quarter conference call that raw material prices are up in the single-to-low double digits and labor costs in China are growing as the economy there rebounds.

AnnTaylor Stores(ANN) noted that they didn't have increase in sourcing cost this year, but next year could be challenging, Sozzi said.

And Victoria's Secret, which is owned by Limited Brands(LTD), has been working with sourcing partners to mitigate the effects of higher cotton prices.

CEO Sharen Turney said during Limited's first-quarter conference call that she doesn't expect to up prices during the second-half of the year. But "what it means for 2011 remains to be seen," she said.

Thus, in order for investors to decide which retailers will outperform in a period of rising costs, they must find companies that have invested capital in technology over the last two years, Sozzi said. The key is finding companies that have a greater technology investment relative to new square-footage growth.

Besides Urban Outfitters, Sozzi also recommends Aeropostale(ARO), American Eagle Outfitters(AEO), 99 Cents Only Stores(NDN) and Wal-Mart(WMT).

Big companies like Wal-Mart tend to be immune, due to their sheer size and leverage over their supplies base, Sozzi said.

Meanwhile, off-price retailers like TJX(TJX) and Ross Stores(ROST) also won't see much of an impact since they buy their merchandise second hand, Jaffe says.

-- Reported by Jeanine Poggi in New York.

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