Literally translates to "in the mouth of the wolf." The proper response is "crepi il lupo," or simply "crepi" for short, literally translating to "may the wolf die." It's sort of like the Italian version of saying "break a leg," but used in all areas of life. Italians tend to be quite superstitious and they hold the belief that directly saying "buona fortuna" (good luck) has the opposite effect and brings bad luck, so to escape this they came up with "in bocca al lupo."
This is just an expression, there are expressions to wish luck in any language.
It’s an idiom – it does not translate literally, but it does translate.
https://en.wikipedia.org/wiki/In_bocca_al_lupo