Another quarter has ended, and you know what that means: Yesterday was the time for furniture maker Hooker (NASDAQ:HOFT) to issue its latest downbeat earnings release.

I'm starting to get a bit discouraged here. Back in September, when we last checked in on this early star of the Motley Fool Hidden Gems portfolio, things still looked pretty rough. After seeing its stock rise sharply on string of record sales and earnings quarters, the company had fallen into a rut of continually declining sales, with profits falling in tandem. There were signs that Hooker was getting back on track in September, however. Inventories weren't climbing as precipitously as they had been. Sales performance beat Wall Street expectations -- not a set of bull horns to hang a Foolish jester's cap on, but it was a start.

Unfortunately, it seems that was a stutter start at best.

As reported yesterday, Hooker finished its fiscal year not with a bang, but with a whimper. Sales were down 3% for the quarter; net income fell 38%. Ouch. And the news for the year was similar: sales down 1%, net income down 35%. Quadruple ouch. The predictable sell-off began after market close last night, and continues as of this writing, with the stock having already fallen 12%.

In my Foolish view, that's entirely justifiable. Hooker has turned in nothing but bad news for more than a year now. It promised more of the same in the quarter to come, and the best news it could produce regarding the balance of fiscal 2006 was that it had a "cautiously optimistic outlook." Which begs the question: After a bad quarter and a lousy year, and with more bad news expected in the quarter to come, what in Heaven's name is there left to be optimistic about?

Well . maybe a couple of things. First, I have to (grudgingly) admit that Hooker's inventory situation is indeed improving. Year over year, inventories actually declined slightly faster than did sales. Second, free cash flow appears to have turned a corner. Profits under generally accepted accounting principles (GAAP) may have been down, but as far as collecting cash goes, the company executed reasonably well, generating $16 million in free cash flow in 2005. That was a marked improvement over 2004's $3.7 million tally, and 35% better than GAAP profits. It also means that, because Hooker had only generated $5 million in free cash flow by the end of Q3, it must have come up with $11 million in Q4 alone.

Is that reason enough for Hooker investors to be optimistic in 2006? Perhaps. But take a cue from management, and make sure you're only "cautiously" so.

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Fool contributor Rich Smith owns shares of Hooker Furniture.