Open the Perps/UV editor layout. Select the shorts and switch to UV component mode. Move UVs around and WATCH how they affect the texture on the model. Do this long enough and you'll understand why the texture is stretching.

As for the look of the stitch, look at some real stitches and compare against your photoshop image. Just like 3d, you should be using references in 2d to get the right look and feel.