Yes, exactly.
The fashion component is key here. Apple will likely continue to want to impress the fashion world with their taste and design prowess, and as such will need to keep the design fresh looking, whether that's a new way to attached the crystal, detailing on the edges, tapering, contouring, wider, different sizes, etc., thickness is certainly one way to approach it. From a hardware perspective, Apple had to freeze the design at some point during the development to meet their ship date. This means there's all kinds of things they discovered during development that they wanted to implement but couldn't. There are reports of features Apple dropped in the 11th hour the will likely be in Gen 2. And then there's the upgrade cycle. After the original watch has been on the streets for a year, and Apple knows how many they are selling each month, and depending on how successful it is, Apple may need to refresh the watch as often as possible to encourage the watch faithful to upgrade, buy a second watch to rotate with their original, and encourage new customers to buy the watch. Who wants to buy last year's watch? Anybody who's passed on the 1G watch, is not likely to decide to revisit it again next year without some new feature the original didn't have, even if it's only better battery life or a faster processor. This seems to be the pattern with every first gen to 2nd gen product Apple has released, the iPhone, and iPad both underwent major design changes within a year of release.
But the 2G will likely have a camera for FaceTime and selfies, as that's almost the first question everybody who sees the watch asks, and expresses dissapointment when they learn it doesn't have one. An IPX8 water rating would be a major improvement for many. GPS another plus. As well as new/better sensors, etc.
So, it will have at a minimum an annual upgrade cycle, with the previous year's model dropping in price to make it available to a larger customer base. People who might not buy the Watch for $400, might for $300. I don't see Apple keeping 3 models in the third year, but they could do worse than offer a 3 year old model for $200 which would effective compete as an alternative against lower-priced Fitbit and the other major fitness bands.