English is a living language. That’s what it comes down to.

A living language is not limited to the dictionary and formal use.

This has benefits and drawbacks. One of the biggest drawbacks is that usage of words can be extremely imprecise and lead you misunderstandings of intended meaning. The flip side of that is that you can usually use words that are “close enough” and be understood anyway, which is a huge benefit.

Since that flexibility allows you to know that cute is at least an adjective that refers to the appearance of something, and is usually a positive usage, you can have the odds on your side if you assume the person saying it is complimenting the other person. That lets you use context to get closer to the intended meaning.

It even works with people that don’t have fluency in English. We native speakers can (with a little effort) usually get the gist of even very broken English and communicate despite the barrier by selecting synonyms until there’s understanding.

Now, in this case, you’ve run into slang usage that only loosely adheres to the dictionary usage.

Cute is used as a synonym for words that convey the meaning meaning of someone being sexually or romantically attractive. This can be with or without the meaning of the target of the word being cute in a more literal sense. People can even be cute and sexy or hot at the same time.

And that’s likely what the people you’re hearing intend. That the outfit is attractive and likely to draw positive attention. While not a great choice for some outfits that you may think of as sexy, it is within common usage of the word, you just likely haven’t run into it in other circumstances before. It isn’t just women that use it for women’s clothing, men will sometimes use it that way too, though it is less common.