Coventry wore a brown strip instead of their usual Sky Blue to mark the club's 125th anniversary and the change appeared to suit them when they grabbed the lead in the tenth minute.
Freddy Eastwood exchanged passes with Clinton Morrison before striking a firm shot into the corner of the net for his first goal for four months.
Watford should have equalised in the 21st minute. Tamas Priskin's stinging 20-yard shot was too hot for Keiren Westwood to handle and when the re-bound fell to Lloyd Doyley, the defender blazed his close-range shot high over the bar.
Chris Coleman's men doubled their lead in the 53rd minute after referee Russell Booth awarded the hosts a free-kick for Ross Jenkins' foul on Robbie Simpson.
The striker stepped up to fire a 25-yard shot beyond Scott Loach and into the net.
But Watford responded by reducing the arrears just four minutes later.
Tommy Smith, making his 300th appearance, rattled the bar with a fine strike and when Priskin collected the ball, he was brought down inside the box by Ben Turner.
Smith's penalty was saved by Westwood when he dived to his left but the leading scorer tucked in the rebound for his 17th goal of the season.
Brendan Rodgers' men were on level terms in the 61st minute when Jobi McAnuff's corner was headed in by Grzegorz Rasiak.
The visitors went in front in the 73rd minute when skipper Jay Demerit headed the ball into the path of Priskin and he back-heeled the ball beyond Westwood.
Coventry were reduced to ten men when Danny Fox was shown a red card for pushing Priskin eight minutes from full-time.