Lineage plasticity-a state of dual fate expression-is required to release stem cells from their niche constraints and redirect them to tissue compartments where they are most needed. In this work, we found that without resolving lineage plasticity, skin stem cells cannot effectively generate each lineage in vitro nor regrow hair and repair wounded epidermis in vivo. A small-molecule screen unearthed retinoic acid as a critical regulator. Combining high-throughput approaches, cell culture, and in vivo mouse genetics, we dissected its roles in tissue regeneration. We found that retinoic acid is made locally in hair follicle stem cell niches, where its levels determine identity and usage. Our findings have therapeutic implications for hair growth as well as chronic wounds and cancers, where lineage plasticity is unresolved.