5.1 and stereo are two different things. I'd take a good sounding stereo system over a so-so 5.1 anyday. But, a proper sounding and performing 5.1 system is better than a stereo system for obvious reasons, except if the 5.1 system is tuned more for moves than music reproduction.
As for the system in question; my uncle has a very similar setup, with the same outboard amp but different seperate preamp. IMO, it sounded terrible on the speakers he had (they weren't kenwoods, I think they were infinity). What he did was buy a newer kenwood 5.1 reciever, and it sounded much better than the older kenwood amp.
With the older setup, he had to use eq and boost stuff to make it sound good; the newer kenwood reciever has a much cleaner amp, and could drive the speakers very well without any eq boost or curve adjustment. To see if this is the same for you, listen to your setup with all the bass boosts, treble and the eq at a flat curve. You will notice that it is lacking definition.
If I were to buy new equipment, I'd go for Paradigm speakers, and a denon or onkyo or harmon kardon reciever.