Severe peripheral nerve injuries have devastating consequences on the quality of life in affected patients, and they represent a significant unmet medical need. Destruction of nerve fibers results in denervation of targeted muscles, which, subsequently, undergo progressive atrophy and loss of function. Timely restoration of neural innervation to muscle fibers is crucial to the preservation of muscle homeostasis and function. The goal of this study was to evaluate the impact of addition of adipose stem cells (ASCs) to polycaprolactone (PCL) nerve conduit guides on peripheral nerve repair and functional muscle recovery in the setting of a critical size nerve defect. To this end, peripheral nerve injury was created by surgically ablating 6 mm of the common peroneal nerve in a rat model. A PCL nerve guide, filled with ASCs and/or poloxamer hydrogel, was sutured to the nerve ends. Negative and positive controls included nerve ablation only (no repair), and reversed polarity autograft nerve implant, respectively. Tibialis anterior (TA) muscle function was assessed at 4, 8, and 12 weeks postinjury, and nerve and muscle tissue was retrieved at the 12-week terminal time point. Inclusion of ASCs in the PCL nerve guide elicited statistically significant time-dependent increases in functional recovery (contraction) after denervation; ∼25% higher than observed in acellular (poloxamer-filled) implants and indistinguishable from autograft implants, respectively, at 12 weeks postinjury (p < 0.05, n = 7-8 in each group). Analysis of single muscle fiber cross-sectional area (CSA) revealed that ASC-based treatment of nerve injury provided a better recapitulation of the overall distribution of muscle fiber CSAs observed in the contralateral TA muscle of uninjured limbs. In addition, the presence of ASCs was associated with improved features of re-innervation distal to the defect, with respect to neurofilament and S100 (Schwann cell marker) expression. In conclusion, these initial studies indicate significant benefits of inclusion of ASCs to the rate and magnitude of both peripheral nerve regeneration and functional recovery of muscle contraction, to levels equivalent to autograft implantation. These findings have important implications to improved nerve repair, and they provide input for future work directed to restoration of nerve and muscle function after polytraumatic injury. Impact Statement This works explores the application of adipose stem cells (ASCs) for peripheral nerve regeneration in a rat model. Herein, we demonstrate that the addition of ASCs in poloxamer-filled PCL nerve guide conduits impacts nerve regeneration and recovery of muscle function, to levels equivalent to autograft implantation, which is considered to be the current gold standard treatment. This study builds on the importance of a timely restoration of innervation to muscle fibers for preservation of muscle homeostasis, and it will provide input for future work aiming at restoring nerve and muscle function after polytraumatic injury.