I was able to successfully update to 8.7.1.
I struggled with this a few months ago....stuck on Preparing, after attempt after attempt. Even went to an Apple Store only to be told the watch has reached end of life. I abandoned the watched update only to retry after stumbling upon a suggestion.
Try this.
1) Do a Force restart on your iPhone.
2) Immediately afterwards, swipe down and turn off Cellular service; keep Wi-fi On only.
3) Start the Pairing process with your Apple Watch.
4) The download (for me) of the update only took 4 minutes, whereas on previous attempts it showed 3-4 hours.
5) BE PATIENT. The "Preparing..." phase may look like it's not moving but eventually did for me (around an hour), eventually moving into the "Installing..." status.
Hopefully that works for you. Good luck.