The regeneration of the skin and its appendages is thought to occur by the regulated activation of a dedicated stem cell population. A population of cells in the bulge region of the hair follicle has been identified as the putative stem cell of both the follicle and the interfollicular epidermis. While this assertion is supported by a variety of surrogate assays, there has been no direct confirmation of the normal contribution of these cells to the regeneration of structures other than the cycling portion of the hair follicle. Here, we report lineage analysis revealing that the follicular epithelium is derived from cells in the epidermal placode that express Sonic hedgehog. This analysis also demonstrates that the stem cells resident in the follicular bulge that regenerate the follicle are neither the stem cells of the epidermis nor the source of the stem cells of the epidermis in the absence of trauma.