The word "sharp" usually means "having an edge or point, and capable of cutting." You use a "sharp" knife to cut your steak. However, "sharp" can also mean intelligent and astute. So if you want to say that a person is not intelligent, you can say he's not very sharp. But if you want to say that in a humorous way, you can use a play on words: "He's not the sharpest knife in the rack." [Or you can say, "He's not the sharpest knife in the drawer."] Similarly, the word "bright" means "emitting or reflecting a lot of light." For example, "This lamp is very bright. But "bright" can also mean "intelligent." "She's a very bright child." So if someone is not intelligent, you can say, "He's not very bright." But if you want to say it humorously, you can say, "He's not the brightest bulb on the Christmas tree." In order to make his statement even funnier, Colbert purposely mixed the elements of two different expressions: "not the sharpest knife in the rack" + "not the brightest bulb on the Christmas tree = "not the sharpest knife on the Christmas tree." There are many, many humorous expressions to say that someone is not intelligent. Here are 100: http://www.jmm.org.au/articles/14071.htm

"He's not the sharpest knife in the drawer" and "She's not the brightest bulb on the tree" (and many similar sayings like "...not the sharpest tool in the shed." "...not the brightest star in the sky." "...not the shiniest penny in the bank.") are ways of saying that the person is not very smart. He's combining two of the phrases to be funnier.

It is a joke saying that the person is not intelligent. We have a phrase, "He is not the sharpest knife in the rack," which means the same thing, Stephen is making a joke within a joke using the noun Christmas tree in place of rack.