Mammalian epidermis consists of the interfollicular epidermis, hair follicles (HFs) and associated sebaceous glands (SGs). It is constantly renewed by stem and progenitor cell populations that have been identified and each compartment features a distinct mechanism of cellular turnover during renewal. The functional relationship between the diverse stem cell (SC) pools is not known and molecular signals regulating the establishment and maintenance of SC compartments are not well understood. Here, we performed lineage tracing experiments to demonstrate that progeny of HF bulge SCs transit through other SC compartments, suggesting a hierarchy of competent multipotent keratinocytes contributing to tissue renewal. The bulge was identified as a bipotent SC compartment that drives both cyclic regeneration of HFs and continuous renewal of SGs. Our data demonstrate that aberrant signalling by TCF/Lef1, transcription factors crucial for bulge SC activation and hair differentiation, results in development of ectopic SGs originating from bulge cells. This process of de novo SG formation is accompanied by the establishment of new progenitor niches. Detailed molecular analysis suggests the recapitulation of steps of tissue morphogenesis.