On a white wintry day in the Smurf Village, Papa Smurf announces that this Christmas will be very special because it is Baby Smurf's first Christmas. As Hefty encourages his fellow Smurfs to make this Christmas one that Baby will remember, Papa Smurf tells the blue infant about how Christmas is the time the Smurfs celebrate with music (as Harmony tries to play along with the Smurfs playing the Smurf song with bells), food (as Brainy and Clumsy get stuck together pulling smurfberry taffy), and by gathering mistletoe from the Great Oak Tree. Papa Smurf shows what mistletoe is used for by kissing Baby Smurf while holding up a sprig. Grouchy says, "I hate kissing"...but then he holds up some mistletoe and sneaks Smurfette a kiss. Baby Smurf then sees that the mistletoe is also used for decorating the village, with Tailor showing a bunch of red and green diapers hanging on clotheslines that would really put Baby in the Christmas spirit all season long. Dreamy sits high on a hill overlooking the village and sighs, saying that this is the time of the year when the whole world is filled with love and holiday cheer.
Meanwhile, Gargamel is writing a letter to jolly old Nicholas the toymaker and gift bringer, asking him to bring six Smurfs for Christmas. He tells Azrael that he writes the same letters year after year, but he knows that someday Nicholas will answer one of them. As he goes outside to send off his letter, Gargamel finds a present outside his door, saying that every year he gets the same kind of present from the Smurfs, and that this time he's not going to fall for it. But as he tries to kick away the present, it explodes, causing Gargamel to lose one of his shoes.
In another castle, Chlorhydris the evil witch rants and raves about Mr. Nicholas spreading joy and cheer every Christmas, which she is sick to death of hearing about as she hates love. As she pulls a cord and descends into the hellish depths of her castle, she plans to give Nicholas a gift of her own -- the kiss of hate.
At this time, Nicholas in his home sings "Deck the Halls" while reading his Christmas list, which as he notices seems to be getting longer year after year. As he continues to work on getting all his presents ready for delivery to the children, a small puppy moans and scratches on the door outside. He happily receives the small visitor who licks his face and takes him inside to care for him.
In a small home, a young boy in rags named Eric is watching over his mother lying sick in her bed, who wishes that her son could have a nice Christmas like his friends, but regrets that the only thing she could give him this year is a little bit of bread. Eric consoles his mother by saying that at least they have each other, which is all that matters. While his mother sleeps, Eric writes a letter to Mr. Nicholas, saying that he needs nothing, only for his mother to be well.
As the Smurfs are out picking more mistletoe, they see Chlorhydris riding in a carriage. They hide and watch as she summons her driver Reeves to climb a tree and get a bit of mistletoe. Papa Smurf wonders what Chlorhydris wants with mistletoe, as it is normally a symbol of love, the very thing she hates, so the Smurfs hitch a ride on the carriage as it takes off again so they could investigate.
Nicholas takes some time to sit by the fire and read the letters that he has received. The first one is from Gargamel, who is asking for a Smurf, despite that which makes Nicholas wonder why he keeps asking the same thing every year when he doesn't even know what a Smurf is. Chlorhydris then shows up at his front door, claiming she's a new neighbor come to bring holiday cheer. As she holds up the mistletoe sprig and kisses him, his cheery demeanor changes to a mean spirit who ends up kicking the little puppy outside his door. Chlorhydris is pleased that her kiss of hate worked, but then the mistletoe shrivels up, and she goes back into her carriage to return to her castle, laughing as she now sees that there will be no presents for the children this year or any year.
While Gargamel prepares for receiving his Christmas presents, the Smurfs who were watching what happened at Nicholas' door come out of hiding to examine the shriveled mistletoe sprig. Papa Smurf sees that Chlorhydris has put a spell on the mistletoe, which means that it has been used for an evil spell that has taken away Nicholas' love. Tailor asks Papa Smurf if he could give Nicholas his love back, but Papa Smurf says that he couldn't, because love must come from within his own heart. As Nicholas goes off to bed to sleep through Christmas, the Smurfs look through his window and wonder who's going to finish the toys and deliver them. Papa Smurf asks his little Smurfs if they're willing to give up their Christmas to finish the job, and they say that they will, that they won't let a mean witch ruin anybody's Christmas.
During Nicholas' resting, the Smurfs sneak into his workshop and complete the abandoned work, with Papa Smurf reading the list and most of his little Smurfs painting and assembling the toys, with Greedy doing the icing work on the cookies. Soon everything is complete and all the requests have been answered, with the Smurfs letting out a sigh of relief. As Tailor goes into the closet to get some wrapping paper, a pile of letters falls out, which makes Papa Smurf realize that they still have more work to do. But then Nicholas wakes up and asks the little imps who they are. As the other Smurfs run and hide, Papa Smurf tells them that Nicholas is under an evil spell, which he denies, and then explains to Nicholas who they were and what they were doing in his house. Nicholas goes to his living room and lets the Smurfs finish the job he has abandoned, saying that he washes his hands clean of doing anything for Christmas.
A while later, the toys are finished and loaded unto the sleigh, and Papa Smurf is at the reins ready to get the reindeer going so that he and his little Smurfs can deliver the presents. But the reindeer refuse to go anywhere without Nicholas controlling them, which means that Chlorhydris has succeeded in her plan to stop Christmas from coming, which makes Baby Smurf cry. Meanwhile, Eric and his mother prepare for a good night's sleep, with Eric hoping that Nicholas would answer his request. Gargamel, also preparing to go to sleep, is already imagining the Christmas dinner he and Azrael will have with Smurfs as the main course. And Chlorhydris settles down for a restful sleep, knowing that this Christmas will truly be merry for her.
The Smurfs finally confront Nicholas to tell him that the reindeer can't go anywhere without him, but Nicholas tells the Smurfs it's their problem now. Smurfette scolds Nicholas for his selfishness, saying that he started the tradition and it's up to him to keep it going. As Nicholas pounds his chair, insisting that he isn't going to do anything, one last letter falls out of the closet. The puppy delivers it to Nicholas, who then finds out that it's from Eric Norton, the poorest boy in town, and all he's asking for is his mother to get well. Nicholas wants to help the boy, but he doesn't feel like he used to. Then Baby Smurf sneaks up to him and starts playing around in Nicholas' beard until he kisses him, which restores Nicholas' cheerful spirit.
The Smurfs cheer at this development, but now they face the problem of getting the presents delivered, and Nicholas now sees that his team of reindeer won't be able to finish by Christmas morning. But then Baby Smurf waves his hands, and soon Nicholas and the Smurfs see that the reindeer and the sleigh are both flying. The old toymaker is amazed by this miracle, and soon he and the Smurfs are now taking to the sky to make sure the children get their presents.
By Christmas morning, Eric wakes up to find a Christmas tree, a Christmas dinner, and a Christmas present in the form of a little puppy all waiting for him, and calls his mother awake to share the exciting news. Eric's mother enters the room, and Eric sees that she is out of bed and walking. She says that she feels so happy that she's now healthy again, which makes Eric also happy that this is the best Christmas.
Meanwhile, Chlorhydris is out for a morning ride with her driver, waiting to see the result of the mayhem she has caused, and spots Eric Norton's house. She tells Reeves to pull over so she could see what this child's Christmas would be like without Nicholas. But instead, she sees Eric and his mother dancing for joy, which makes her realize that Nicholas has broken her spell and vow that she will get revenge eventually. At Gargamel's hovel, the evil wizard looks at his stockings to see what Nicholas has left him, and finds nothing except a wind-up mouse that Azrael chases around on the floor.
Back in the Smurf Village, the Village Smurphony Orchestra plays while the Smurfs dance around the Christmas tree, happy that Baby Smurf's first Christmas has turned out to be (in Painter's words) magnifique. Handy, however, wonders how Nicholas' reindeer were able to fly, and all Papa Smurf could say is that it's something that will forever remain a mystery.