Concerning musical content, this album is O.K. I would not rate it the best album of all-time, of the 1960s, or of 1967. I don't think it's the best album by the Beatles either, but it's memorable for a variety of reasons, and I'd give it 3-stars.
People are noting that this album is the #1 choice in amazon.com's Best of the Millenium poll. The popularity of this album is attributable more to demographics (the study of population trends) and nostalgia than musical content. The baby boomers were at impressionable ages and the world was experiencing significant change in 1967. These factors combine to create vivid memories of where people were, what they were doing, and what they were listening to. An attraction to those times by this large population has lifted this album, and a lot of 60s and 70s music to the top of these polls. As time passes and this population decreases in size, this album too, will fade.
Put more simply, the same amazon.com poll rates Millenium by the Backstreet Boys as the #3 album of the century. So, if you choose to cite this poll as support for your view of Sgt. Pepper, you imply support for the Backstreet Boys at #3.
In summary, this album is not as bad as some say and not as good as some claim.