Yes, the n stands for naughty. It's a convention which I myself think is out of date. Back when it was coined the majority of nfic was, I believe, of the mind candy, romp variety. Nowadays, the genre encompasses a far greater range of themes.
Hmmm . . . Back when I read BtVS fic, I always thought it stood for the "N" in "NC-17." But "naughty" fits too.
And I agree that "Nfic" is definitely better than "sex fics" or even just "smut." My earlier posts about "smut" was just an observation I'd been curious about since I started reading Nfic in the BtVS fandom, and wanted to get other people's take on it.