It's not a phrase I have used much (perhaps because I normally wear blue jeans and polo shirts), but the dress is too red that it washes the girl out. This means that the dress is so red, so bright, perhaps, that it makes the girl herself, her skin especially, look very pale in comparison. And no one who cares about what they wear wants to look pale. For more information: http://answers.yahoo.com/question/index?qid=20120320220831AAV4ObS

The speaker is saying red does not suit her coloration. It overwhelms her. It is not a color suitable for her to wear.