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Jodie is insane.
Having lost her family in a tragic accident, Jodie snapped years ago and went to live in an abandoned department store because she couldn't handle reality. Sam, Mrs. Pennypacker, and any other human guests are hallucinations, while Muffy is a plush mouse that Jodie started talking to. Jeff is a genuine mannequin, albeit a perfectly ordinary, non-magical one. He has a childlike personality to replace Jodie's own dead child, and his magic hat fulfills Jodie's need to control and take care of someone. Everything magical that happens in the store is a hallucination due to Jodie's psychosis.