I agree with Vela, Ive recently started my own buisness and word of mouth is the most powerful form of advertising so be wary of upsetting the owners because I doubt they will keep it quiet. I know its not your fault but If it was me I would take it as a learning curve and make changes like a form as others have suggested so it doesnt happen again.

Just remember that if you do a good job the word will go around and recommend you to a few people, Do something to upset people and it will spread to about 10 people!

I would refund them their money and apologize even though you didn't lose them just to keep them happy because at the end of the day its 2 dogs boarding probably for the rest of their lives for the one off price of 2 jackets. I know its fustrating paying out when its not your fault but think of the longrun.