The reason CC:ing doesn't work normally in sheik's up-b lag or rest lag (or any type of lag) is because your not actually CC:ing, you're just ASDI'ing down. ASDI down has the same effect on most attacks as CC:ing does, as long as your char doesn't fall over from them.
The reason it does is because ASDI down will make you touch the ground on the same frame that you would've been sent flying. And on many attacks touching the ground will CANCEL all the hitstun. There are exceptions to this rule (like meteors and spikes always have the same amount of ground stun). But for things like sex kicks, tilts (usually), smashes (might be exceptions) it almost always works (unless the attack makes you fall over, off course)
There are probably details here I'm missing, but I've tested this alot and it seems to be the general rule.
But ASDI down doesn't ACTUALLY reduce hitstun in the way that normal CC:ing would (which is why the stun of meteors and spikes remain the same)
I'm guessing that because needles don't send you in the air, it has ground stun in the same way that meteors and spikes do. So ASDI down won't cancel the hitstun in any way (most likely)
Buut if needles->grab is never a real combo they can always buffer spot dodge out of it, regardless of DI. It is very likely that that's the case, I've shined out of it as fox (more then once). Also, the timing for a needles->dsmash combo in training mode is pretty tight, and dsmash is faster then a grab... the more I think about it, I realize that needles->grab most likely it isn't a real combo
So yhea, dthrow->arial should be the best option (if they're not killing range).