You get the santa set (hat, shirt, pants, boots and beard), then on Toy Day, find Jingle and he will ask you to help him. He'll give you a sack that has everything the villagers want inside. You go find the villagers and they'll think your Santa and hope you have the perfect gift for them. Using the hints you collected, you'll give them the correct gift.
- - - Post Merge - - -
I don't think the level of friendship matters. I hope not. I'll have to follow the method of stalking Wolfgang if that's the case since he just finished moving in today... Just keep talking to them and it should work.