In New York City in 1933, dance director Andy Lee auditions kids for the chorus of a new show called Pretty Lady ("Audition"). The show's writers, Bert and Maggie, like what they see on stage, but they warn the dancers that at $4.40 per seat, the audience will demand some spectacular dancing. Young hopeful Peggy Sawyer arrives late, just missing the audition. Billy, the show's romantic lead, helps her see the producer, Julian Marsh ("Young and Healthy"). Julian has no patience for latecomers, and Peggy rushes off the stage. Julian tells Bert and Maggie he's worried about some of the cast, especially Dorothy Brock, the leading lady. Her last hit was ten years earlier, but her sugar daddy, Abner Dillon, is backing the show. When Dorothy and Abner arrive, Julian suggests that Dorothy audition. Abner reminds Julian that Dorothy does not have to try out for anyone, but Dorothy sings anyway ("Shadow Waltz").
Realizing she has forgotten her purse, Peggy returns to the stage. Maggie invites her to lunch with three of the girls, and the five women dance off stage. As they settle in at the Gypsy Tea Kettle, the girls are astonished by Peggy's naïveté. They amusingly explain the Broadway facts of life, and dance back to the theater ("Go into Your Dance"). The number evolves into an audition for Peggy, who impresses Julian and lands a job in the chorus.
Dorothy and Billy begin rehearsing their big love scene. Abner objects to their kissing and insists they shake hands instead ("You're Getting to be a Habit With Me"). Peggy, weak and overcome by an exciting day, faints on stage. She is carried to Dorothy's dressing room, where Pat Denning, Dorothy's real boyfriend, is waiting. Dorothy walks in, and misreading what she sees, thinks that Pat is two-timing her. Julian suggests that Pat leave town.
The company packs up for previews in Philadelphia ("Getting Out of Town"), and dress rehearsals begin ("Dames"). After rehearsal, Peggy invites Julian to join her at an impromptu cast party. Captivated by her charm, Julian decides to go. Dorothy, who misses Pat, drinks a bit too much, and tells Abner to take his money and leave. Abner is ready to close the show, but the kids talk him out of it. Pretty Lady opens spectacularly with "We're In the Money." But when Dorothy rushes onstage for the Act I finale, Peggy accidentally knocks her down, injuring her leg. Julian, furious, fires Peggy and cancels the rest of the performance.
The second act opens with a doctor telling Julian that Dorothy's ankle is broken. Julian says he will close Pretty Lady for good, but the cast won't give up ("Sunny Side to Every Situation"). The cast thinks that Peggy can save the day, and Julian finally agrees. Peggy has already left for the train station, so Julian rushes after her. Telling her to "think of musical comedy, the most glorious words in the English language," Julian convinces Peggy to return ("Lullaby of Broadway").
Peggy has exactly 36 hours to learn 25 pages, 6 songs, and 10 dance numbers. As Julian says, by the next evening, he'll have "either a live leading lady or a dead chorus girl!" At long last, the Broadway curtain opens on Pretty Lady ("Shuffle Off to Buffalo"). The show is a spectacular hit, and Peggy Sawyer is a sudden sensation. Julian leads the entire company in celebrating the glory of "Forty-Second Street."