Peggy initially places the gnome facing the street. When Sally arrives, she says that it's facing southeast instead of north. Later, when Hank and Bobby face the new gnome towards north using a compass, it's still facing the street instead of being turned to face into the corner by the front door.
A random passer-by tells Peggy that her garden gnome should be facing north, because that's how they find the tree moss they use to brew gnome tea. Moss tends to grow on the shady side of trees. In the northern hemisphere, this means the moss grows on the north side of the tree, so to see the moss, the gnome should be facing south.