Willie T. Stokes (Billy Bob Thornton) and his dwarfed assistant Marcus (Tony Cox) are professional thieves. Every year, Willie disguises himself as a department store Santa Claus and Marcus disguises himself as an elf in order for both of them to rob shopping malls blind at night. Marcus takes his duty as an elf extremely seriously, but Willie is an alcoholic, a sex addict, and is gradually unable to perform his Santa duties appropriately with children plus likewise a diminish in his safe-cracking performance, much to Marcus’ dismay. When they are hired at the fictional Saguaro Square Mall in Phoenix, the vulgar remarks made by Willie shock the prudish mall manager Bob Chipeska (John Ritter), who brings it to the attention of security chief Gin Slagel (Bernie Mac).
At the mall, Willie is visited by Thurman Merman (Brett Kelly), a friendly but exceedingly naive and gullible, overweight boy who thinks Willie is really Santa. Thurman is a constant target of bullying by a teenage gang of skateboarders. At a bar, Willie meets Sue (Lauren Graham), a woman with a Santa Claus fetish, and they begin a sexual relationship. Willie is harassed by a man in the bar, but Thurman intervenes. Willie gives Thurman a ride home, then enters the boy’s house where he lives with his senile grandmother (Cloris Leachman). Thurman reveals that his mother died, and his father, Roger, is away “exploring mountains” (meaning he is actually in jail for embezzlement) until next year. Willie tricks Thurman into letting him steal from the house safe and steals a BMW owned by Thurman’s father.
Bob informs Gin that he overheard Willie having sex with a woman in a mall dressing room; Gin starts to investigate. Willie goes to his motel room and sees it being raided, causing him to take advantage of Thurman’s naivete and live in his house, much to Thurman’s delight. The next day, Marcus gets angry at Willie for taking advantage of Thurman, and states his disapproval of Willie’s sex addiction when Willie makes a rude remark about Thurman’s grandmother.
Gin’s investigation of Willie includes visiting Thurman’s imprisoned father, who reveals that Willie is staying with Thurman illegally. He confronts Willie at the mall, and takes him and Marcus to a bar. There, he reveals that he has figured out their plan, blackmailing them for half of the cut to keep silent.
Willie attempts to commit suicide by inhaling vehicle exhaust fumes. He gives Thurman a letter to give to the police, confessing all his misdeeds and information about a heist that will take place in the mall on Christmas Eve. Willie notices Thurman’s black eye, which persuades him to make an example of the skateboarding bullies. The next day, he confronts and beats up the gang’s leader, frightening the other members into stopping their acts towards Thurman. A renewed sense of purpose for Willie has him attempt to train Thurman in boxing and self-defense.
Enraged at Gin for blackmailing him, Marcus and his wife Lois (Lauren Tom) set up a trap for Gin, feigning needing a jump start for their vehicle from Gin’s. Lois hits Gin with the car, then Marcus kills him.
On Christmas Eve, when the heist is almost complete, Willie goes to get Thurman a pink stuffed elephant that he had wanted for Christmas. Just as he gets the elephant, Marcus reveals to Willie that he intends to kill him, fed up with his increasing carelessness. Lois tells him to hurry up and kill Willie so they can get away with the money and merchandise. But just as Marcus is about to shoot Willie, the police swarm the trio, tipped off by the letter Willie gave to Thurman. When Marcus opens fire, the police shoot at him and Willie flees. Determined to give Thurman his present, he leads the police on a chase to Thurman’s house, ignoring orders to freeze. He is repeatedly shot on Thurman’s porch, but survives.
The epilogue is told through a letter from Willie, who is in a hospital recovering. He expresses his gratitude for Thurman in giving the letter to the police and his name was cleared of unarmed robbery adding that he (Willie) will be working for the police as a sensitivity counselor. Shooting an unarmed Santa embarrassed the police, and Sue is granted guardianship over Thurman and his house until Thurman’s father, Roger, is released. Willie also explains that Marcus (identified as Santa’s Little Helper) and Lois are doing time behind bars for their actions, while expressing hope Roger is wise to avoid the two. When the lead skateboard bully harasses Thurman again, Thurman finally stands up to him by kicking him hard in the crotch and riding his bike away while flipping off the downed bully.
Later, Seth quits the wrestling team at Wolfe’s prompting, confessing that he is in The Sound of Music after Murney catches him under the bleachers, practicing his dancing. When Murney threatens the boy, Wolfe challenges him to a wrestling match in front of the entire school. Despite Murney’s show of bluster, Wolfe easily wins. The training Wolfe gives the Firefly Scouts becomes useful when they once again have a conflict with the thuggish scouts. The girls beat and tie up the boys, refusing to let them go until the thugs agree to stop bothering them. Zoe and Wolfe share stories of their fathers, both of whom have died in similar circumstances. They are interrupted by a phone call from Julie, who has figured out the password (“My Angel”), retrieved the item in a box (a special key), and is on her way home. The kids immediately begin to plan a ‘Welcome Home’ party. Less than an hour later, Wolfe discovers a secret vault underneath the garage, which requires a key to open. When Fawcett and Julie arrive home, Fawcett and Wolfe go to the garage, where Wolfe says he is rethinking his career. The two ninjas seen earlier arrive armed, and pull off their masks, revealing themselves as the Plummers’ North Korean neighbors, the Chuns. Fawcett suddenly knocks out Wolfe, proving that he is in fact a double agent. They tie up and gag Zoe, Seth, and Lulu, place Peter and Tyler in the playpen, and Fawcett and Mrs. Chun take Julie to the vault while Mr. Chun looks after the children. They manage to open the door, but the dangerous security system prevents them from going any farther.
The children, all tied up tightly and gagged with cloths, managed to escape after untying themselves by taking down Mr. Chun through their teamwork. They awaken Wolfe, who goes to the vault to help Julie, sending the kids to summon the police. Mr. Chun follows them in his car; with Zoe at the wheel, the kids force him to crash. Wolfe figures out how to get past the security system, using a dance (“The Peter Panda Dance”) used to make Peter go to sleep each night to avoid its traps. He, Julie, Fawcett, and Mrs. Chun engage in combat, and end the fight when Julie knocks out Mrs. Chun. Wolfe’s voice activates the final vault, knocking out Fawcett with the door. By then, the children have lured a large crowd of police to the house. Mr. Chun, however, holds all of them at gunpoint. Wolfe notices school principal and love interest Claire Fletcher (Lauren Graham) right behind him, having followed the chase when she saw it pass by the school. Wolfe, aided by Gary the duck, distracts Mr. Chun, whereupon Claire knocks him unconscious.
With their missions accomplished and Fawcett and the Chuns arrested, Wolfe and the Plummers say their goodbyes, and Wolfe and Claire share a kiss. The family attends Seth’s performance, where we learn that Wolfe has retired from the Navy and joined the school staff as the new wrestling coach. Murney is shown briefly on stage, where he is singing “Climb Ev’ry Mountain” off-key while dressed in a nun’s habit, as the film concludes.