NEW YORK — Lower demand, higher promotional costs and a $5.6 million payment to end a 1998 compensation agreement with vice chairman David Chu led Nautica Enterprises Inc. to sharply reduce fourth-quarter earnings estimates as it reported third-quarter earnings that were down 18 percent from year-ago levels, but met Wall Street’s expectations.

The revision has no effect on Chu’s role within the company.

Nautica now expects fourth-quarter earnings per share of between 2 and 4 cents, down from earlier estimates of 26 cents and fourth-quarter EPS of 39 cents in 2000.

The downward revision includes a fourth quarter pre-tax charge of $4.5 million, or 8 cents per share, in connection with the purchase and cancellation of the 1998 agreement with Chu.

Under the terms of the arrangement, also announced Wednesday, Nautica agreed, in exchange for a $5.6 million payment to Chu, to buy and cancel all rights flowing to Chu under the 1998 agreement which gave Chu the right to receive a payment, subject to certain limitations, of 1.5 percent of the net sales of certain merchandise sold by Nautica’s subsidiaries. Included in the cancellation is the $1.2 million Nautica had accrued for this purpose in fiscal 2002.

Chu remains vice chairman and a director of Nautica and creative director of the Nautica brand. The new agreement leaves intact separate 1987 and 1988 arrangements which give Chu 50 percent of the net income that Nautica Apparel Inc., the licensing subsidiary of Nautica Enterprises, receives from licensing the Nautica name and trademark.

Last year, Chu received just under $1.24 million in salary, bonuses and other compensation.

For the third quarter ended Dec. 1, the company reported net income of $13.6 million, or 40 cents a diluted share, matching Wall Street estimates, compared with income of $16.5 million, or 50 cents, in the year-ago quarter. Sales were up 12.5 percent to $201 million from $178.6 million.

Shares of the company on Wednesday closed at $13.53, down 9 cents, or 0.7 percent, in Nasdaq trading.

Harvey Sanders, chairman, president and chief executive, said sales were driven primarily by strong performance in the existing men’s and women’s jeans business, retail outlet operations and new businesses such as the Earl Jean acquisition last year.

New business will continue to boost sales while dragging on profitability

Dennis Rosenberg, analyst at Credit Suisse First Boston, wrote in a research note issued Wednesday that fourth-quarter selling, general and administrative spending is likely to increase 33 percent to support new businesses including the Rockefeller Center store, John Varvatos line and men’s underwear. He cut his fiscal 2003 EPS estimate to $1 from $1.30, and pegged fiscal 2002 at 85 cents from $1.03. “We project relatively flat sales,” he said. “Growth from Nautica’s new businesses should be offset by an estimated mid-single digit decline in men’s sportswear sales.”

Rosenberg said the company also expects declines in it’s boys’ wear, European and retail operations during the year’s final period.

Sanders said, “We continue to diversify our businesses and are laying the framework to leverage the Nautica name into new lines and distribution channels by exploring appropriate opportunities to build a presence in Nautica women’s sportswear and further testing specialty retail formats.”

For the nine months, income was down 22.5 percent to $25.7 million, or 75 cents a diluted share, from $33 million, or $1, in the comparable year-ago period. Sales rose 14 percent to $535.5 million from $469.5 million.