I've had the same problem. What fixed it for me is putting my watch into Airplane mode, but leaving the bluetooth enabled. It was then on the "Preparing..." step for a LONG time, but eventually completed successfully. I'm guessing that it's trying to use WiFi if available and must be timing out.
NOTE: I've used this same trick to get my Apple Watch 3 to update to the last couple of OS updates too.
Lerpy
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