At the start he was a typical strutting, bravado, Alpha male, only interested in being cool for his friends, which is why he initially blanked Sandy on the first day of school.
Danny wanted to get his leg over, Sandy wanted the innocent romance.
Over the course of the film, he changed. He walked away from his "cool" friends as they left the house where the girls were having a sleepover. He let down his "cool" guard by hugging his friend when he was asked to drive the car in the race and was embarrassed about it afterwards.
Just before "You're the one....", he was talking to his friends about his changes after realised Sandy was so important to him and he was willing and happy to change his "cool" ways for her! Ironically, Danny realised he wanted Sandy just as she was, i.e. the Shy next door virgin, so Sandy didn't need to change at all!
Sandy realised she didn't want to stay being a shy virgin (hence her songs about virginity and changing).
Danny's cardigan and Sandy 2's tight clothing were just metaphors for the changes in attitude they both made, i.e. growing up, from school days transitioning into adult life.