Yes, it will most certainly compete directly with traditional watches. Why? Because you only have one wrist to wear a watch on (two if you don't mind looking like a total geek.) And no, the Apple watch does not offer more functionality than a traditional watch because the CENTRAL function of a traditional watch is as an object of personal style. Additionally, most mid to high end watches are water resistant to fairly deep depths and that isn't the case with the Apple watch.
So, again, it's going to be a VERY hard sell for Apple in many important market segments. Imagine, for example, if Apple were trying to replace women's shoes with the Apple Shoe. That's kind of what they're trying to do here. Take a central fashion object for men (and to a lesser degree women) and replace it with an Apple gadget. That is not a trivial notion.