Could someone explain the Kevin Bacon joke in Guardians of the Galaxy?

This is just a funny reference to the movie Footloose, a dancing movie from the 80s starring the actor Kevin Bacon in the lead role. In fact Peter does summarize the story of this movie quite accurately:

Well, on my planet, we have a legend about people like you. It's called Footloose. And in it, a great hero, named Kevin Bacon, teaches an entire city full of people with sticks up their butts that, dancing, well, is the greatest thing there is.

Seeing that the movie was released in 1984, it should've been one of the most recent movies Peter watched as a child before his abduction and he is indeed quite into dancing. And seeing that the story of the movie was about convincing people to dance, it fits the bill pretty well as a parable for his and Gamora's current situation.

_{As a side note, after this scene I waited for an actual Footloose homage later in the movie, which unfortunately didn't come, but if any movie could have included that it would have been Guardians of the Galaxy, I guess.}

The laugh was more because she took his reference way too literally. "A stick up someone's butt" in this country refers to people who are way too strict or have no sense of humor. You don't have to see Footloose to get that he doesn't mean they really have sticks up their butts. Just like the joke "nothing goes over my head, I'm too quick".