Studies in humans and mice have revealed that hair follicle morphogenesis relies on tightly coordinated ectodermal–mesodermal interactions, involving multiple signals and regulatory factors. DNA methylation and long non-coding RNA (lncRNA) play a critical role in early embryonic skin development by controlling gene expression. Acting as an indirect regulator, lncRNA could recruit DNA methyltransferases to specific genomic sites to methylate DNA. However, the molecular regulation mechanisms underlying hair follicle morphogenesis is unclear in cashmere goat. In this study, RNA-seq and whole-genome bisulfite sequencing (WGBS) in embryonic day 65 (E 65) and E 120 skin tissues of cashmere goat were used to reveal this complex regulatory process. The RNA-seq, qRT-PCR, and immunohistochemistry results showed that Wnt signaling played an important role in both hair follicle induction and differentiation stage; transcriptional factors (TFs), including HOXC13, SOX9, SOX21, JUNB, LHX2, VDR, and GATA3, participated in hair follicle differentiation via specific expression at E 120. Subsequently, the combination of WGBS and RNA-seq analysis showed that the expression of some hair follicle differentiation genes and TF genes were negatively correlated with the DNA methylation level generally. A portion of hair follicle differentiation genes were methylated and repressed in the hair follicle induction stage but were subsequently demethylated and expressed during the hair follicle differentiation stage, suggesting that DNA methylation plays an important role in hair morphogenesis by regulating associated gene expression. Furthermore, 45 upregulated and 147 downregulated lncRNAs in E 120 compared with E 65 were identified by lncRNA mapping, and then the potential differentially expressed lncRNAs associated with DNA methylation on the target gene were revealed. In conclusion, critical signals and genes were revealed during hair follicle morphogenesis in the cashmere goat. In this process, DNA methylation was lower in the hair follicle differentiation compared with the hair follicle induction stage and may play an important role in hair morphogenesis by regulating associated gene expression. Furthermore, potential lncRNAs associated with DNA methylation on target genes were delineated. This study enriches the regulatory network and molecular mechanisms on hair morphogenesis.