How to remove previous owner from gifted Apple Watch?

You should remove the watch from her account and then setup the watch to your account. Activation Lock is designed to prevent anyone else from using an Apple Watch if it's ever lost or stolen.

About Activation Lock on your Apple Watch - Apple Support

Activation Lock is an anti-theft feature that cannot be bypassed. Only the previous owner can remove the lock by using their Apple ID & password. See the 'Before you buy a watch from a third-party' section in:

What to do before you sell, give away, or trade in your Apple Watch, or buy one from someone else - Apple Support

If your sister is the ORIGINAL owner and she can't remember her Apple ID or password, then see the 'Start a support request' section in:

How to remove Activation Lock - Apple Support

Here are two ways to unpair your watch if your sister no longer has the paired iPhone:

• See the 'How to erase your Apple Watch if you don't have your iPhone' section of:

Unpair and erase your Apple Watch - Apple Support

• With a web browser, go to: https://www.iCloud.com and sign in with your Apple ID. Open Find My iPhone and select All Devices (at the top). Then click your Apple Watch, select 'Erase Apple Watch', and select Next until the device is erased. Finally click "X" next to remove your Apple Watch.