OED2 and Webster's 3rd both list the literal sense of "woolgathering" / "wool-gathering". So LEO should keep the entry. However, a pretty extensive search of the amazon.com database and Google results convinced me that the literal sense of "woolgathering" is obsolete, and should be marked as such. I wasn't able to find a single document that used the literal sense, other than those explaining the origin of the figurative sense.
"woolgathering." Webster's Third New International Dictionary, Unabridged. Merriam-Webster, 2002. http://unabridged.merriam-webster.com
(6 Sep. 2004).
Main Entry: woolgathering
1 : the act of gathering wool shed from the sheep in tufts and found caught on bushes
2 : the act of indulging in vagrant fancies : foolish or purposeless thinking or imagining
wool-gathering vbl. sb. and gerund.
1. The action of gathering fragments of wool torn from sheep by bushes etc.
1581 J. BELL Haddon's Answ. Osor. 424 b, You Diuinitie raungeth very much at random, as if they were strayed and runnyng in some wildernes a woolgatheryng.
1878 E. PEACOCK in Archaeologia XLVI. 384 Wool-gathering yet goes on in many places even on enclosed lands
1889 H. JOHNSTON Chron. Glenbuckie xxii. 261, I got it by working for it -- hard 'oo'-gathering and hard spinning. [...]