Can it be used to steal ANY equipped clothing/armor?

Jarls robes, guard armor, etc?

Or is it far from perfect...

Some stuff cannot be stolen.

You can not steal clothing from Essential characters. The rest is all fair game. Just note that the option to steal clothing is not always available even for non essential characters and you might have to try a few times to get the option. Not sure why that it but usually stealing what they do have and then going back later gives you the option.

You must be completely undetected by the character for their equipped items to appear for stealing, and essential characters cannot have their worn items stolen, though weapons are fair game. And, of course, you can't steal unplayable equipment.

You can't leave a character naked, as outfits reappear if you leave and come back, but weapons will stay gone, and this can be used to your advantage when you encounter someone who you know you'll have to kill.

Can your steal Kariah the bard's outfit?

Well, yes; she is not essential, and her outfit is playable.

But it's not acquirable through non devious means!