This should be easy enough to splain away....
After the destruction of the Hellmouth under Sunnyvale, California, (with the rest of the town along with it) in the final episode of 'Buffy The Vampire Slayer', it would be hard for Buffy Summers to then stay out of the public spotlight. Especially once the theatrical movie about her was released (probably made by that covert group which I call "UNReel".)
And because he was a vampire, Damon would more than likely know the truth about the Slayers and have heard the stories of the current one, Buffy.
As for the reference to 'Xena, Warrior Princess', I don't think there's a Zonk here. We don't know if he meant it as a shout-out to Xena herself. He may have just been using the term "Warrior Princess" as a title to be bestowed upon Elena, mostly in sarcastic jest.