Tissue development and regeneration depend on cell-cell interactions and signals that target stem cells and their immediate progeny. However, the cellular behaviours that lead to a properly regenerated tissue are not well understood. Using a new, non-invasive, intravital two-photon imaging approach we study physiological hair-follicle regeneration over time in live mice. By these means we have monitored the behaviour of epithelial stem cells and their progeny during physiological hair regeneration and addressed how the mesenchyme influences their behaviour. Consistent with earlier studies, stem cells are quiescent during the initial stages of hair regeneration, whereas the progeny are more actively dividing. Moreover, stem cell progeny divisions are spatially organized within follicles. In addition to cell divisions, coordinated cell movements of the progeny allow the rapid expansion of the hair follicle. Finally, we show the requirement of the mesenchyme for hair regeneration through targeted cell ablation and long-term tracking of live hair follicles. Thus, we have established an in vivo approach that has led to the direct observation of cellular mechanisms of growth regulation within the hair follicle and that has enabled us to precisely investigate functional requirements of hair-follicle components during the process of physiological regeneration.