What do the children think when they first notice Esteban's body in the story "The Handsomest Drowned Man in the World"?
The answer to your question can be found at the very beginning of the story, in the first paragraph:
THE FIRST CHILDREN who saw the dark and slinky bulge approaching through the sea let themselves think it was an enemy ship. Then they saw it had no flags or masts and they thought it was a whale. But when it washed up on the beach, they removed the clumps of seaweed, the jellyfish tentacles, and the remains of fish and flotsam, and only then did they see that it was a drowned man.
The children, due to their natural innocence and because of the remoteness of the area in which they live, seldom have visitors coming to their village. According to the story, everybody knows each other, and this has been the case for ever. This is basically the gist of the story: the isolation of these people bind them together as a family, more so than a community. The entrance of this drowned man that washed up on the shore was, therefore, a huge deal for the villagers.
The woman embraced the man, the kids had been playing with him for a few hours not finding anything creepy about him, and the men of the town felt amazed by him. Therefore, the entrance of this handsome man was a welcome diversion from the repetitive life of these villagers, who took him in as one of their own.