I recently bought a hat from Boston Scally Company. It wasn't a super cheap made-in-China $10 hat like you can easily find on Amazon or eBay, I paid $50 for it. When I got the hat, it was covered in threads. Some needed to be cut off. When I emailed the company, their reply was "we're sorry you aren't happy with the quality of the hat, you can just remove the threads and it won't affect the integrity of the hat."
That's the wrong response. The correct response is "We're embarrassed the hat shipped to you like that. Would you like us to send you a replacement or do you want to send it back for a refund?" I am certainly not going to buy anything from this company again when they can't acknowledge their screw up.
Own your mistakes. In almost all cases it's the right move and you earn the respect of the customer.