Lrig1 is a marker of human interfollicular epidermal stem cells and helps maintain stem cell quiescence. We show that, in mouse epidermis, Lrig1 defines the hair follicle junctional zone adjacent to the sebaceous glands and infundibulum. Lrig1 is a Myc target gene; loss of Lrig1 increases the proliferative capacity of stem cells in culture and results in epidermal hyperproliferation in vivo. Lrig1-expressing cells can give rise to all of the adult epidermal lineages in skin reconstitution assays. However, during homeostasis and on retinoic acid stimulation, they are bipotent, contributing to the sebaceous gland and interfollicular epidermis. β-catenin activation increases the size of the junctional zone compartment, and loss of Lrig1 causes a selective increase in β-catenin-induced ectopic hair follicle formation in the interfollicular epidermis. Our results suggest that Lrig1-positive cells constitute a previously unidentified reservoir of adult mouse interfollicular epidermal stem cells.