What can I do to fix this error: Argument 1 missing or nil?

I see multiple problems with this.

Btw I recommend not naming the NPC "Sword gal". You can keep the name if you want.

cd.MouseClick:Connect(function(plr)
    if  plr.weapon.Value == "Wood Sword"then
    plr.PlayerGui.itemStatus.Text.name.Text = "Sword gal"
    plr.PlayerGui.itemStatus.Text.Text = "You already have this!"
    plr.PlayerGui.itemStatus.Text.Visible = true
    wait(1.7)
    plr.PlayerGui.itemStatus.Text.Visible = false
    else
    if plr.StarterGear:FindFirstChildOfClass("Tool") then
        --:IsA("Tool") isnt required and you forgot to put ("Tool") in :FirstChildOfClass()
                plr.PlayerGui.itemStatus.Text.name.Text = "Sword gal"
                plr.PlayerGui.itemStatus.Text.Text = "You already have a weapon, if you want to reset it click on your current weapon GUI."
                plr.PlayerGui.itemStatus.Text.Visible = true
                wait(6)
                plr.PlayerGui.itemStatus.Text.Visible = false
    end

[For the complete and correct answer, see CandyWreckEpicness' answer below this one.] [This answer is wrong, and I stand corrected. See comments under this post]

You are just finding if the first child of StarterGear is a tool. Since some players might not have any Tool, Line 9 will give you '1 missing or nil', since you are asking if "nothing" is a tool.

What happens is:

1. Get the child of Starter Gear
2. Is it a tool?

To fix this, you should check first if a child exist.

-Is there a child?/Is it not NIL?

*There is a child.

1. Get the child.
2. Is it a tool?

*There is no child.

1. Do nothing

if plr.StarterGear:FindFirstChildOfClass() then
     if plr.StarterGear:FindFirstChildOfClass():IsA("Tool") then
          plr.PlayerGui.itemStatus.Text.name.Text = "Sword gal"
          plr.PlayerGui.itemStatus.Text.Text = "You already have a weapon, if you want to reset it 
          click on your current weapon GUI."
          plr.PlayerGui.itemStatus.Text.Visible = true
          wait(6)
          plr.PlayerGui.itemStatus.Text.Visible = false
     end
end

If Line 1 does not work, try

if plr.StarterGear:FindFirstChildOfClass() ~= nil then

But in my experience, "if yes" works the same way as "if not nil"