Your manual says the following:
To use this function, you must select the
TV/CD input selector and your TV must support ARC
Verify that HDMI-1 Input of the TV does support ARC, some TV's has it on HDMI-2 or -4...
Here's the manual
Also, verify the following:
Change Digital Audio on your TV to Dolby Digital
Finally, I can't find an exact answer but I think ARC only outputs compressed 5.1 (just like a SPDIF connection, coax or optical, would) and is not capable of delivering lossless audio. The movies you play off a stick: are they low-quality encodes or do they have lossless audio tracks? If they do, you'd lose a lot, so I wouldn't recommend doing that.
Doesn't your receiver accept USB sticks for playback?
Could it also be the cable? did you try other HDMI cables?
Also, maybe follow the steps here: ARCEdited by shpitz - 9/26/13 at 7:39am