I am not a native speaker. To me this sentence means just "to go outside for a cigarette break". What interpretation leads to racist/sexist undertones?
Well, if your mind is attuned to seek out offence at every opportunity, you might say that "nip" is short for Nipponese (like Brit is short for British Person) and "fag" is an old word for homosexual.
But of course "Nipponese out for a homosexual" makes no sense and no one would ever say that...
A once common sentence which, after not hearing it for years, suddenly contains connotations of rasism and heterosexism.