As a former employee of Lands' End, I can attest to the quality of their customer service. (The quality of the internal employee care is less good than it used to be, since back when I started there in 1998, but I could just be bitter after the I/S department layoffs! :-)
Anyway, the whole customer service area is saturated in an ethic of serving the customer. It really is amazing. For example, there are no timers on the calls. Ever wonder why some CSR's are so brusk? Well, they're usually trying to beat the clock. If their average call time goes above some magic number (often as low as two or three minutes) then they get written up by their supervisor. No such problem at Lands' End.
I had to smile that Joel linked to the OCS (The Online Customer Store where he orders his logo'd shirts). I was one of the lead developers on that project. :-)
As for what happens to the returned items? They're sold off in the company employee store for a few dollars. If the company makes stipulations about the use of their logo, then a patch is applied over it, before selling to the employees, to protect the customers brand. As I recall, most customers don't mind.