Digital transformation is reshaping the fashion industry, driving significant operational shifts to meet evolving consumer demands. This study examines the Portuguese fashion industry, focusing on how digitalization fosters sustainable business models and addresses Generation Z expectations. It explores the interplay between digital transformation, sustainability, and consumer engagement in a dynamic market. Findings reveal that while advanced technologies remain limited, tools like blockchain are improving transparency, processes, and sustainability. These innovations help brands meet Generation Z’s demand for ethical production, environmental responsibility, and inclusivity. Through a mixed-methods approach combining interviews, surveys, and secondary data analysis, the study uncovers practical strategies (adaptability, innovation, and sustainability) adopted by Portuguese fashion companies to enhance competitiveness and build a resilient and consumer-focused fashion industry.