EMILY: I’ve combed every fine antique store on the East Coast and this is all I could find. I blame Peg Mosley.
LORELAI: Hm, Peg Mosley. Evil, evil woman.
RORY: What did Peg Mosley do?
LORELAI: She lured these two German children to her gingerbread house, and then she tried to eat them.
Lorelai is referring to the well known German fairy tale Hansel and Gretel, which was first published by the Brothers Grimm in 1812. In the story, two children named Hansel and Gretel are abandoned by their parents in the woods, and make their way to a witch’s house. As it is made of gingerbread, they cannot resist eating it, but the witch has a plan to eat Hansel and make Gretel her slave.
Lorelai is making fun of her mother’s rivalry with Peg Mosely by suggesting that any stories she has about Peg are greatly exaggerated.