In mouse hair follicles, a group of quiescent cells in the bulge is believed to have stem cell activity. Lgr5, a marker of intestinal stem cells, is expressed in actively cycling cells in the bulge and secondary germ of telogen hair follicles and in the lower outer root sheath of anagen hair follicles. Here we show that Lgr5⁺ cells comprise an actively proliferating and multipotent stem cell population able to give rise to new hair follicles and maintain all cell lineages of the hair follicle over long periods of time. Lgr5⁺ progeny repopulate other stem cell compartments in the hair follicle, supporting the existence of a stem or progenitor cell hierarchy. By marking Lgr5⁺ cells during trafficking through the lower outer root sheath, we show that these cells retain stem cell properties and contribute to hair follicle growth during the next anagen. Expression analysis suggests involvement of autocrine Hedgehog signaling in maintaining the Lgr5⁺ stem cell population.