Express regret that you couldn't help the customer this time but set the stage for the future. Although you lost this sale, take the opportunity to generate interest in other products. Enclose a brochure, catalogue or flyer highlighting other merchandise.
1234, Main Street
Boston, MA 02123
<Recipient Address Goes Here>
We are sorry that <product being returned> is not what you are looking for. <Optional alternatives>
I regret that we couldn't meet your needs this time but look forward to serving you in the future.
encl: <List of enclosed items goes here>