Imagine you're the poster child for all of your industry's ills. Critics accuse you of taking advantage of the poor. You're the target of the do-gooders' ire. And the government -- at both the federal and state levels -- changes the rules of the game on you so you need to change your business model.

Welcome to the world of Advance America (NYSE:AEA), the country's leading payday lender with some 2,750 storefronts in 36 states. The fact that this company has still been able to advance some 18% this year in the face of such challenges shows the resilience and profitability of the service.

Can it make a repeat performance in 2007?

Challenges to overcome
When images of goon squads showing up to break your legs are routinely raised in describing your business, it's a particularly salty picture. So even though payday lenders are not roughing up their customers, industry critics nonetheless enjoy conjuring up thoughts of them as latter-day loan sharks.

Besides some bad press, let's look at some of the other hurdles Advance America faces:

  • Legacy costs associated with its prior agency business model that was abandoned when the FDIC changed the rules of the game nationally.
  • Rivals like First Cash Financial (NASDAQ:FCFS), Cash America (NYSE:CSH), and EZ Corp (NASDAQ:EZPW) have alternative means of earning revenues, like pawn shops and used car dealerships, or have less exposure to the U.S. market and its onerous regulations.
  • Lawsuits from states that don't appreciate the company's end run around their regulations by introducing new products. (When they want you out of business, it doesn't matter that you're playing by the rules.)
  • An economic downturn could play havoc with its customers' ability to repay the loans.

A chance to advance
Advance America focuses on making short-term loans to consumers. For that service, it's paid a fee that's nominal by itself, though as an annual rate, it can look steep. Over the past year, even in the face of being forced to close down operations in North Carolina at the end of 2005 and Georgia in 2006, there were still a total of almost 150 net new store openings last year.

To continue that growth strategy, Advance America can continue to follow its game plan:

  • Grow by opening new stores. The company is geographically diverse with operations in more than half the states, with only California commanding a large presence and accounting for 11% of company revenues in 2005. There's still plenty of room to grow.
  • Operate on the credit service organization (CSO) model following the FDIC rule change.
  • Focus on a single service. Advance America keeps operations streamlined. Management kept a lid on expenses in 2005 and for the first nine months of 2006, they rose a miserly 4% compared to a 6% increase in revenues, which also served to improve gross margins.

Value for your dollar
Year-over-year revenue comparisons for the third quarter remained difficult because it takes time for a store to establish itself. In 2005, it had more stores in place for over a year than it did in 2006. Even so, revenues for stores that had been open in 2005 and were still open last year increased 4.6%, while expenses actually decreased year over year. Profits from those sales were also up more than 13% over the year before.

Gross margins rose 520 basis points from last year, while operating and net margins also enjoyed year-over-year improvement. With the company selling at a discount to its peers thanks to a P/E ratio of 17, Advance America has some room to advance.

Foolish bottom line
Without question, the leading payday lender has a few mine fields to navigate through. It's what has kept the company's share price from rising like the competition has. But with a broad national base of operations and a single-minded focus on providing a core service, it's Advance America's game to lose.

It's not surprising, then, that Motley Fool CAPS players apparently agree, advancing it a 4-star rating, with 94% of the players thinking it will outperform the market. I look to see Advance America jumping ahead in the year ahead.

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Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

Advance America is a recommendation of Motley Fool Inside Value, where a 30-day guest pass gets you inside all of the market-beating value picks.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.