Returns: Don't know the policy in the US, but here you have a certain right to return items within an x amount of time. I really don't see this happening to scores of books. Even if he had a hundred books returned in two weeks, this shouldn't kill his store. He could either have a serious talk with the distributer (having sold substandard products ;-), or sold them at a heavy discount (50% off gets people to buy even crap).
Trade-ins: Here is that competency issue, you don't blindly buy up at a fixed rate, even if it pleases your customers (or you shouldn't complain if it comes back to bite you in the ass). Buy only what you can reasonably expect to sell, at a price that's way below buying from the distributer. If you already have product x collecting dust for weeks, you don't buy any more!
Impact on community: That business is not there to be used as a buffer for consumers that buy anything without looking at reviews or buying everything sight unseen nd shove the owner with the repercussions. On the other hand the owner seems to be ok with it...
A company shouldn't have to choose between keeping customers happy and making money...
This is reality, while in theory I agree with you, this just doesn't happen that often. First you make money, then you worry about keeping your customers happy. If you do it the other way around, chances are that you won't be long enough in business to be remembered by your customers.
A lot of game stores rode the Magic wave since 1993, the Pokemon wave since 1998, and Yu-gi-oh! wave post 2001. Remember those mythical stories of the hay days of WotC, when Magic was at it's pinnacle? Those were good times for games stores as well, D20 was received by a lot of folks as the next 'big' thing, so they bought more then they should, more then was financially sound. The same thing happened on the Internet, it was called the dot com bubble, business overextending. The reason a lot of stores went belly up was because they overextended themselves because they followed the hype and the hype wasn't always what it was supposed to be. Those who bet well, made a lot of money, those that didn't, lost it all. I think it's wrong to put the blame with the products and their producers, they only provided what the consumers demanded (within their capability, expertise and budget). If D20 didn't happen, I am confident that the same thing would have happened, instead of spending too much resources on RPG books, too many resources would have been spent on CCGs or mini games that came out in 2000.