I'm thinking you handled that pretty well. You did not have to cover or leave, the Co-Mgr was educated for the future and likely came out of it with a positive experience himself! I don't believe it gets much better than this. Not bad for a n00b!!
I had a similar experience with our local WalMart here in Pennsylvania, except the Asst Mgr claimed that a customer had complained.
He was not aware of WalMart's corporate policy, and we spent several minutes covering it. Next I asked him if this customer was still in the store. Suddenly they were unable to locate him/her!
I suggested that since WalMart's policy was to allow it, and the Mgr's only issue was the customer complaint, that I should be allowed to go about my business without having to cover it or leave, since the "complainer" could not be located.
He agreed, thanked me for my 'understanding', and we parted under relatively pleasant terms. He was pleasant throughout, and a little nervous as well as apologetic, so I took the opportunity to see how far our conversation would go.
For my part I was satisfied with how it ended, and I have not had an issue since. He said he was glad our encounter went well and that our discussion was so pleasant for him, despite the possibly confrontational nature of it. He also stated I should fell welcome to OC in his store from now on!
This was the closest I have had to a neg encounter in over a year, although my encounter with a York City cop was even more positive!