Learn Croatian: Sretan Božić, bako! - Merry Christmas, grandma!

Because you are addressing your grandma directly, you must use the vocative case. For most feminine nouns ending in -a, the vocative ending changes to -o (like bako) or sometimes -e.

Is Sretan Božić in the nominative or accusative case here?

It is technically in the accusative case because it is a shortened version of Želim ti sretan Božić (I wish you a Merry Christmas). Because Božić is an inanimate masculine noun, its accusative form looks exactly the same as the nominative. This is why the adjective is sretan rather than sretnog, which is only used for animate masculine nouns.

Why is Božić capitalized in Croatian?

In Croatian, holidays are treated as proper names, so they are capitalized. However, for multi-word holidays, only the very first word is capitalized unless a later word is also a proper noun (for example, Nova godina for New Year). Since Božić is a single word, it gets the capital letter.