I wanted to report another datapoint of running into this defect with newer hardware and software than the original poster. I do this to provide evidence that whatever fix Apple has attempted for this issue has not fully resolved it.
Hardware/Software:
iPhone 6S Plus, 128GB / iOS 10.0.2 (current as of my posting)
Apple Watch Edition, Series 2 / watchOS 3
Initial setup was done at the Apple Store using their setup wifi in Pudong, Shanghai, China.
Chose English as language, region as United States (which has to do with unit display formatting, as I understand it), and install all apps. Ran to completion at store, played with for another 10 minutes before leaving to see if I had any initial questions. So things were definitely "completed".
That evening and next day tried to do outdoor walks in open areas for extended period of time, no distance ever recorded.
After reading posts here, I unpaired and setup again at home, this time changing a few options:
Chose English as language (same), region as China (different), did not install all apps (different).
Distance tracking has now worked correctly for last three days. For those with a series 2 watch, it should not take 20 minutes to determine if distance tracking is working--I went outside right after re-setting up and distance tracking worked within mere meters using outdoor walk as the activity (thanks to GPS).
Hope this helps others who might still be seeing this issue even with recent hardware.