When I worked retail, if someone returned an item purchased with a gift certificate, we gave them a store credit for that amount.
If they exchanged an item for a different size/color/non-defective/non-broken same item, we did not charge them anything for the exchange - we took the original product, gave them the replacement and said "have a nice day".
This is not the employee's fault - the manager of the store verified the policy (see the OP). This is a store/company policy that screws the customer.
Having worked retail for years, I do not believe the customer is always right and I do not believe that the store should do anything to make the customer happy. But in this instance, the company is wrong.
