In the story, two tricksters pretend to sew the emperor a suit of clothes so elegant and refined that only the most elegant and refined people can actually see the clothes; the trick is that they take the emperor's money and sew him no clothes at all, only pretending to dress him up in an elaborate costume. The courtiers fear that, if they tell the truth about what they see (a naked emperor!), they will be revealed as lacking in elegance and refinement, so they all praise the emperor. When the emperor finally goes on parade to show the new clothes to his subjects, a little child shouts out, "But he has no clothes at all!"
(Image from Michael Clarke Stuff at Flickr, CC licensed.)