If people say that you stink does it mean that you smell bad or are simply not good at something?

It can mean either one, depending on context. It can also mean that they just don't like you or your personality.

In some cases, it is hard to tell which context they mean. For instance, if you performed poorly at sports and are also dripping with sweat, then it is hard to tell which one they mean. In that case, hit the showers first, then try to figure out what went wrong and work to improve your performance.