It could have been worse, but that doesn't mean it was good.

Judging from the market's reaction to Bassett Furniture's (NASDAQ:BSET) first-quarter 2007 earnings report, I'm in the minority with that view. Investors largely seem to have looked at the 15% year-over-year decline in sales, noticed that it was smaller than the 16% to 18% that Bassett management had predicted one month ago, and decided the shares deserved to be bid up a bit.

It's an understandable move -- that's how the power of diminished expectations works. What's more, the less-than-expected sales slide wasn't the only good news from Bassett yesterday. The company also managed to cut its inventories 17% year over year, exceeding the pace of its sales decline. Moreover, Bassett reduced the rate at which it burns cash, slowing from $5.2 million in Q1 2006 to just $4 million in negative free cash flow in Q1 2007.

But that's where the good news stops.

The bad news
Here we have plenty: Profits fell precipitously, natch. The fall in revenues made that a given. But more important than the quarter-by-quarter ebb and flow in earnings, in my view, is the long-term trend to which Bassett seems leashed. Students of the furniture industry will know this one by heart by now. The litany of plant closings, layoffs, and asset divestitures being recited by everyone from Furniture Brands (NYSE:FBN) to La-Z-Boy (NYSE:LZB) to Stanley (NASDAQ:STLY) to Hooker Furniture (NASDAQ:HOFT) is no secret.

Now, I'm no wizard -- financial or otherwise -- but I'm still game to try my hand at clairvoyance. Here's how I expect Bassett's story to play out over the coming quarters. It's just closed its namesake factory in Bassett, Va., but it has two more furniture factories operating in the United States. If rival Hooker's history is any guide, those two operations are also in danger of closure.

Hooker had to switch to an almost pure import operation in order to remain profitable; the market's demand for domestically produced wood furniture was drying up. Compared to Hooker's cash balance, Bassett is in much more dire straits, with only $8.4 million in cash and $19.4 million in long-term debt. For the second quarter in a row, Bassett had to sell investments, call on dividends from subsidiary International Home Furnishings Center, and increase its debt in order to fund its dividend and operational cash burn.

If things don't turn around soon in the furniture industry, I foresee Bassett being forced to slash or eliminate its dividend, at the least. At the worst, I predict further plant closings -- the only question being whether Bassett can shutter them, and convert to an import-only model, fast enough to avoid becoming insolvent.

Like horror movies? Are you a fan of Shakespeare's tragedies? Do you rubberneck at car crashes? Then you'll love reading about the U.S. furniture industry's travails. Gorge yourself on punishment with:

La-Z-Boy is a Motley Fool Income Investor recommendation. To see how dividend-paying companies can help you outperform the market, click here for a free 30-day trial. Hooker Furniture and Stanley Furniture are both Motley Fool Hidden Gems recommendations.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.