The wool is sheared manually while driving past the sheep in a trolley. The wool is then automatically fed through channels into a chest.

The block above each sheep is an upside down staircase with the shorter side facing the water!

I think the screenshots show it all, start at the top if you build it.
I may do another YouTube tutorial on this.

Instructions:

As I said, it should actually be visible and accessible.
You will need 2 redstone torches, sheep, possibly paint, glowstone, grass, rails, drive rails, detector rails, water, pack ice (better than ice as it doesn't melt), hoppers, chests and fences.
It is important that the stairs are placed above the sheep with the missing corner of the stairs facing down towards the water.
If you don't want to spawn the sheep in creative mode, you have to put the sheep in the boxes first, and then push the stairs with pistons down onto the sheep heads.
Otherwise first build the boxes with stairs, and then spawn the sheep in the boxes.
Very important are the 2 Redstone flares, which are located under the carrier block of the last and first (! drive!) rail.