Children skate on a pond. Charlie Brown and Linus leave their homes to join in the fun, but on the way they stop to discuss Charlie Brown's ambivalence towards Christmas. When they arrive, Snoopy begins a game of crack-the-whip and then grabs Linus's blanket, throwing Charlie Brown into a snow bank.
Charlie Brown checks his mailbox for Christmas cards, but finds none. He sarcastically thanks Violet for the card she sent, then runs across Pig Pen who is building a dirty snowman. The kids catch snowflakes on their tongues and try to knock a tin can off a fence with snowballs. After watching for a while, Linus forms his blanket into a sling and knocks off the can.
Charlie Brown visits Lucy at the psychiatrist's desk. He tells Lucy he's depressed and is worried that he should be happy at Christmastime. Lucy suggests a series of phobias he might have; Charlie Brown thinks he has pantophobia, the fear of everything. Lucy suggests he needs to be more involved and that he start by directing the school Christmas play.
Snoopy, meanwhile, begins decorating his house in hopes of winning cash in a lights and display contest, and Sally writes her letter to Santa, suggesting that money would be a satisfactory alternative. Charlie Brown is upset with their commercial focus.
When Charlie Brown arrives at the auditorium, the kids are rehearsing their play, which consists entirely of music and dancing. They're very concerned about Charlie Brown's ability to direct. As he tries to explain his directing strategy, the kids gradually stop listening and return to their dance. Lucy, as script girl, hands out scripts and costumes: an innkeeper, a shepherd, a wise man. Snoopy, as the only animal, has to play a sheep and cow, and demonstrates his ability to imitate a penguin and vulture as well if necessary. He then imitates Lucy as she gives orders, much to her annoyance. Frieda ad Pig Pen are ambivalent about their parts as innkeeper and wife. Sally is assigned to be Linus' wife, to her joy. Lucy, however, is worried about her part as the Christmas Queen. The kids continue to insist on music and dancing, so Charlie Brown suggests a Christmas tree as a good prop. Lucy wants a big aluminum tree, possibly painted pink. Charlie Brown and Linus go to a find a tree, and visit a glamorous tree lot with aluminum trees in all kinds of colors. But Charlie Brown chooses a tiny shrub with almost no needles.
Back at the auditorium, Schroeder wants to play Beethoven for the play. Lucy disagrees, so Schroeder tries a jazzy number. Snoopy starts dancing to it, but both Lucy and Schroeder glare at him until he slinks away. Lucy requests Jingle Bells instead, and Schroeder tries several variants before finding one she likes. At that point, Charlie Brown and Linus return with their tree, which is universally derided as too small and ugly. Charlie Brown decides he doesn't understand what Christmas is all about, so Linus recites the Christmas Story from the book of Luke in the Bible. "That's what Christmas is all about, Charlie Brown," he says.
Charlie Brown takes his tree and leaves. The other kids follow. Charlie Brown intends to decorate his tree beautifully and bring it back for the play. He takes an ornament from Snoopy's prize winning decorations, but when he puts it on his tree the branch droops all the way to the ground. In frustration, he walks away. The other kids then gather around the tree and decorate it with Snoopy's decorations. When they make it look nice, they begin singing, and Charlie Brown returns. "Merry Christmas, Charlie Brown!" everyone yells, and they all break into "Hark, the Herald Angels Sing", as credits roll.