Categories are used for grouping your products into classifications. You can view your full list of categories by clicking on the 'Store' section, then clicking the 'Categories' sub-section.
To add a new Category, just click 'Add Category'. Then add an image of the category (if applicable) and choose a category name. For instance, you could create a Category called Apparel. Then you would place products like t-shirts, hats, etc. underneath that category. For more information on working with products, click here.
Additional, within the Categories list under the Actions menu, you can add subcategories. Subcategories can be used for more in-depth grouping (e.g. men's and women's apparel).