Here's where things stand now:

The factory cone adjustment was not too bad... maybe a little tight (zero play but didn't feel like it was binding much). In an attempt to get this hub to stop jumping in and out of high gear I tried all kinds of adjustments including too loose, riding each time to see if it helped. It didn't.
I know some people with this hub say it's smooth and great, but I have nothing but bad things to say about mine. I'm still waiting to hear back from Sturmey, and the online retailer I got it from. Not sure what to do next... I guess I'll give them a couple more weeks to respond before taking further steps.