What does 魔法少女 Mahou Shoujo mean?

Mahou shoujo means magical girl: a girl with magical powers, and the anime and manga genre built around her. The shoujo in it is the plain noun for a girl, not the magazine category the same word names elsewhere.

The characters

魔法 is magic; JMdict glosses it as magic, witchcraft, sorcery and spell. Jisho glosses 魔 as witch, demon or evil spirit, and 法 as method, law or rule; as a word, the compound simply means magic. 少女 is girl, glossed by JMdict as a girl usually between seven and seventeen, from 少, few or little, and 女, woman.

What the dictionaries say

JMdict defines 魔法少女 as a magical girl in anime, manga and the like, a girl with magical powers, or a young witch. The Jitsuyō Nihongo Hyōgen Jiten on Weblio files it under 魔女っ子, majokko, witch girl, giving 魔法少女 as the alternative notation and defining the word as a young woman who uses magic in creative works such as manga and anime.

Two different shoujo

The shoujo page explains the word as a readership label for manga. In this compound it is not that. Both dictionary definitions above describe a character, not a readership: the word says who the heroine is, not who is reading.

The pun inside it

The characters have a trick in them that Puella Magi Madoka Magica uses. 魔女, majo, witch, is spelled with the first and last characters of 魔法少女. In episode 8, as transcribed on Wikiquote, Kyubey says that since the girls will eventually become witches, it makes sense to call them magical girls. The English line keeps the logic and loses the spelling, a point the Madoka Magica quotes page also makes.