Sheik stays as a Transformation or is a separate selectable character. Either, or. I'd rather have Pig Ganon anyway since he does have a weapon early on and could have a far more interesting moveset, imo.
And you did make it clear Sheik is gone, otherwise I wouldn't be saying that. Just remember, Zelda never fought outside of her Sheik form besides two non-canon games that Nintendo hates and the TV show. And maybe the Comics. Why would she be playable in Smash without her battle counterpart, the one she uses to do the fighting? That makes no sense. Almost everybody fights naturally as well. Or at least has fighting moves by default. Zelda stole all of hers from Link or got fully made up ones. Sheik was fully implied to fight in OOT and does so in the Manga as well. It's not till WW that Zelda herself ever fought. So no, I doubt she'd have been in without her battle outfit. I would feel it's more like Ganondorf would have been in Melee over her if Sheik didn't exist. And some other character that wasn't a clone. Diddy if they could get past the copyright issues is a fair option. Maybe a Gen II Pokemon besides Pichu.(actually, not representing Gen II is a travesty. Every time the latest Gen is always repped by a playable character. I don't think that should change, even if the previous one gets shafted out of one for it. Each one has been really cool.)