Following the events of the previous film, Zoe manages to survive her encounter with the Yule Log, which did indeed threaten her life. Tragically, her companion, Alex, was not so fortunate and was killed during the chaos. Authorities initially dismiss Zoe's story about the sentient Yule Log and the supernatural occurrences surrounding it, believing instead that she was hallucinating or misinterpreting events. Their skepticism is fueled further when the Yule Log escapes from the evidence locker, causing a massive explosion that destroys crucial video evidence of the incident, making it impossible to prove what truly happened.
In the aftermath, Zoe becomes overwhelmed by fear, convinced that the log is still after her. Her panic worsens during a professional meeting, leading her to have a severe anxiety attack that results in her losing her job at the Coral Conservancy. Struggling to cope with her trauma, Zoe's close friend Jakesy encourages her to take a break from her nightmare and suggests escaping to a peaceful town for a relaxing vacation. Jakesy envisions this as a chance for Zoe to leave behind her dark experiences and embrace a brighter, more hopeful chapter—like the kind of cheerful Hallmark-style romantic comedy they both deserve. As they hit the road, a mysterious Santa Claus observes their journey and uses his magical powers to bring their car to a halt in the small, seemingly idyllic town of Mistletoe, which becomes the setting for their new adventure.
Once in Mistletoe, the scenery shifts dramatically from the dark, horror-filled atmosphere to a bright and cheerful Christmas landscape, filled with joyful music and festive decorations. The town is preparing for its annual Yule Log Festival, a beloved holiday tradition. Despite the town's cheerful appearance, Zoe is eager to escape her haunting memories, and her anxiety level rises when she encounters an obnoxious, wealthy influencer named Beauregard. She soon meets Birt, a recent widower and owner of Savannah’s Christmas Ornaments—a shop named after his late wife. Birt is accompanied by his young son, Jaxon, and his caring mother Nana, who help run the family business.
Tensions rise as Beauregard, who owns a competing ornament store, threatens to put Birt out of business. Despite the rivalry, Zoe and Birt begin to form a bond over their shared grief—their partners, whose cremated remains they have yet to properly honor. Zoe finds herself attracted to Birt, and as she opens up about her traumatic past, Birt believes her story and supports her healing process. Believing that the Yule Log was likely destroyed in the explosion, Birt suggests using an EMDR-style device to help Zoe confront her fears and begin to recover emotionally. For the first time in a long while, Zoe feels genuinely hopeful and begins to immerse herself in the life of the town, helping out at the store and forming bonds with the residents.
Her most meaningful breakthrough comes when she manages to recreate Savannah’s special shrimp fudge recipe, which Birt’s wife had developed but was never able to perfect after her death. Zoe’s success in recreating the recipe not only symbolizes her emotional healing but also sparks a new connection between the two. Meanwhile, Jaxon notices that when the shrimp fudge accidentally drips onto a coral ornament, the coral begins to glow and grow—suggesting that something magical or supernatural might still be at play.
Meanwhile, the original Yule Log has managed to find Zoe and the town once again. However, Santa and Holly, who survived the events of the first film, intervene just in time and destroy the log. Unbeknownst to everyone, a tiny splinter of the Yule Log survives the destruction, lodging itself into Nana’s hand. Zoe enters her visions and climbs into a freezer, where she encounters a miniature version of Nana. Inside, Nana reveals a cryptic message: "Only love's remains will defeat the hate," and Zoe sees visions of her departed loved ones, [Alex] and Savannah, boxing together in a strange, mystical plane.
As Christmas Day dawns, the town gathers for a festive dinner during the Yule Log Festival. The celebration quickly turns into chaos when the Yule Log emerges gruesomely from within Nana’s body, transforming her into a log creature. The horror escalates as the creature infects and ignites the town's other Yule Logs, turning them into monstrous, destructive entities that massacre the citizens. Jaxon, initially believing Nana might have gained incredible powers, tries to help her but is attacked. Zoe and Birt struggle to fight the regenerating logs, their efforts seemingly futile.
In a moment of clarity, Zoe remembers Nana’s words of love and hope. She and Birt confess their feelings and, with renewed determination, throw the ashes of Alex and Savannah—symbolizing their love’s remains—onto the creature, which ultimately leads to its destruction through the combined spirits of Alex and Savannah. Though the Yule Log is vanquished, Zoe resolves to leave Mistletoe and continue her journey of recovery.
Birt’s store is on the verge of closing, but it unexpectedly gains new interest when fans of the massacre flock to buy ornaments crafted by the now-infamous Nana. A month later, Birt reimagines the store into a quirky museum—a shrine to ornaments, Savannah’s shrimp fudge, and the Yule Log massacre—drawing visitors from all around. Zoe returns, ready to begin a new life with Birt, and their budding relationship seems promising.
Just as they celebrate their happiness, Zoe’s former boss arrives with an offer to rehire her, recognizing her talent and the mysterious healing properties of the shrimp fudge. As Zoe and Birt enjoy their romantic moment, Jaxon secretly applies some of the fudge to a twig he found left by the Yule Log, whispering to Nana that he will bring her back. Suddenly, the movie’s tone shifts again, revealing that the Little Man in the Fire, the Alien, cultists, and other horrors from the first film have returned, descending upon the cheerful town and its new peaceful occupants—setting the stage for even more supernatural chaos and horror to come.
