I have been asking myself the same question for years, and some people told me I must have dreamed it...until today when I found the answer. The "movie" you are thinking of is an episode of the Jim Henson Hour entitled "Lighthouse Island". It was made in 1989. Here a description from Wikipedia
Zeb Norman comes to a strange small island town in search of the perfect gift for his fiancée, Rosalie. Zeb has never met Rosalie, but has fallen in love with her through an exchange of letters. He finds just what he's looking for in a pair of silver slippers at a local antique/curio shop owned by Clara Buford, but before he can obtain them, Clara insists that he accompany her to nearby dark, mysterious Hog Island so she can retrieve a pearl stolen from her by her rival, Fred. As it turns out, the pearl bestows upon its owner the power of transformation, and when Fred sees them coming, he takes action. As he takes on the form of a sea monster, a flying beast, and a giant tentacle, the success of Zeb and Clara's mission is suddenly very much in question.
Here is the link to the article.
Lighthouse Island - Muppet Wiki - a Wikia wiki