Matuschek's, a gift store in Budapest, is the workplace of Alfred Kralik (James Stewart) and the newly hi Ed
Klara Novak (Margaret Sullavan). At work they constantly irritate each other, but this daily aggravation is tempered by the fact that each has a secret pen pal with which they trade long soul-searching letters. Romantic correspondence is sent back and forth, and while Alfred and Klara trade barbs at work, they dream of someday meeting their sensitive, caring and unknown pen pal.
Christmas is fast approaching, and the store is busy. Alfred had been with the store for some time, and has always been treated well by Mr. Matuschek (Frank Morgan), but lately his attitude has changed. Alfred is at a loss, and Matuschek avoids any explanation, finally telling Alfred that it would be best if he left. Stunned, Alfred accepts his last paycheck and says goodbye to everyone, including Klara. For once they are civil to each other.
A long awaited meeting of the secret pen pals was planned for that night, and Alfred having just lost his job has no desire to go. Finding he can't fight his curiosity, he wanders to the restaurant where they'd agreed to meet and peeks in the window with his fellow employee. Of course, Klara is there waiting for him, with the chosen book and wearing a red carnation they'd agreed to use as a signal. Realizing that he'd been wrong about her all along, and that his irritation with her was actually masking his attraction, he finally enters and goes over to her table, but does not reveal his true reason for being there although he is aware she will be hurt that her pen pal doesn't show up. Alfred, hurt by her rudeness, finally leaves, knowing that she will wait all night for someone who is no longer coming.
Meanwhile, back at the store, Mr. Matuschek has a late-night meeting with a private detective. He knows that his wife has been having an affair with one of his employees, and was convinced it was his trusted friend, Alfred. The detective however tells Matuschek it is in fact another employee and, heart-broken over his wife's infidelity he retires to his office. The delivery boy, returning late, enters and prevents Matuschek shooting himself with a pistol. Collapsing in grief and shame, Matuschekis rushed to the hospital.
The next day Alfred visits Mr. Matuschek in his sick bed, where he asks for Alfred's forgiveness and puts him back to work, now as manager of the store. The delivery boy is rewarded with a raise to a store clerk. Klara arrives at work late, obviously heartbroken after the failure of her correspondent to materialize last night. When she finds Alfred in the manager's office she doesn't believe him and when she discovers it is true she faints in the middle of his office. Later, as she is resting at home, Alfred pays her a visit, and while he is there her aunt brings her another letter from her secret pen pal that explains his not being at the meeting because he saw her there with Alfred. Relieved about the misunderstanding she swears to Alfred she'll be back at work in the morning. Alfred is obviously working on a plan to reveal himself to Klara.
Christmas Eve is here, and everyone works through the day. Mr. Matuschek has nearly recovered from his sickness and stops by to see how things are going, and when the final tally is made, the store has had its best sales day since 1928. Delighted, he hands out bonuses to all, and takes the new stock boy out for Christmas dinner. Alfred and Klara are getting ready to leave, and she has another date with her mystery pen pal, but Alfred delays her with a few questions. She's never yet seen him and doesn't even know his name but is convince end she will be engaged when she comes back to work. He tells her that the mysterious pen pal stopped by to see him earlier, and he is in fact fat, bald, older and unemployed and quite willing to live off Klara's income. Alfred reveals himself when he puts a red carnation in his lapel and suddenly eveything becomes clear to her.