The SS Zelda would work fine for Smash Bros. As for her not looking like a fighter, as mentioned by Thareous, Peach doesn't look like one either--and for that matter, neither do some other Brawl characters like Olimar. They could give her a new move set; for example, her up-B recovery move would most likely have something to do with flying a short way on a bird.
As for the Sheik transformation, I say they take it out and give Zelda a different down-B move. First of all, that would be a bit of a change (which I wouldn't mind) that would give Zelda a little bit more uniqueness as a character herself; and second of all, it would open up the roster for another new character--Impa. In SS, Impa (at least, I assume that character is Impa, as I haven't gotten far enough to learn her actual name) seems to have a lot of the ninja qualities that Sheik had. It would allow for more individuality in Sheik's--or rather, Impa's--character as well. I think it's a pretty cool idea, anyways.
Regardless, we'll just have to wait for the next Smash Bros. to come out before we can tell for sure. Doubtless Zelda will be in it, though.