There are several reasons why the Kelvey girls are shunned by the other children. First, Lil and Else Kelvey are the daughters of a "washerwoman," someone who goes from house to house each day, cleaning for other people. Second, there are rumors that the girls' father is in prison. So, their parentage is humiliating for them, or at least their community believes that it should be, on two counts. Other families do not want their own children to associate with girls who have such infamous parents.
Third, Mrs. Kelvey dresses the little girls in "bits" of fabric that have been gifted to her by the people she works for. In other words, she is thrifty, and she makes the girls' clothing from other people's cast-offs. This makes the girls terribly conspicuous, as they wear clothing made from other people's tablecloths and curtains, hats that are much too big for them with funny accessories, long white dresses that look like nightgowns, and the like.
Fourth, Else "would have looked strange" no matter what she wears because she is a "tiny wishbone of a child," with short-shorn hair and big eyes like an owl. She doesn't smile and she rarely speaks. Lil is "stout [and] plain" and wears a loudly patterned dress and an adult's hat atop her "high forehead." According to the narrator, "What a little guy she looked! It was impossible not to laugh." The pair of girls seems strange and ridiculous to others.