A sheath is a protective case for a knife or a sword. The most exciting part of a staged sword fight might be the moment when the hero pulls his weapon out of its sheath.
A sheath is also a dress that is straight, fitted, and simple. You might advise your Aunt Martha to choose a sheath dress for her third wedding, instead of the white lace gown with the long train. The word sheath most likely comes from the Old English scēath, meaning a divide or a split, like the split piece of wood which originally served as a sword's sheath.