Lynne says that she has always been accused of being a material girl. George doesn't agree because there isn't a lot of material in the dress that Lynne is wearing.
Initially, we do not know where George and Lynne are. It is quite dark judging by the backgrounds. It could be George's sex dungeon.
Lynne is making a reference to the fact she spends a lot of money on trivial items that represent her status. She doesn't need all those shoes and bags, but it makes her feel better. In addition to this, she is a fan of Madonna and has wanted to get the 'Material Girl' reference into casual conversation for quite a while now.
George has not heard the song, nor the phrase, so believes it literally refers to material, hence his last statement. He is a little taken aback by Lynne's dress that he has forgotten to get dressed himself. He is once again in his gardening shirt. It is rare for Lynne to be ready before George.