Creating sub categories in the Listings Directory app is very much creating sub pages for the rest of your website.  On the Add/Edit Page, you just select the Parent Page from the drop down menu, of the category you want this category to be under:

Simple, right?!  Now this new page will be under that Parent Page.

If you want a Sub Category to display under a Category in the Listings Directory display, just make sure that display is checkmarked: