<PAGE>

                                                                    Exhibit 10.4


  Confidential treatment has been requested for certain portions of this
  document which have been omitted and filed separately with the Secretary of
  the Securities and Exchange Commission. Omitted portions are indicated by
  [REDACTED].


                                LETTERHEAD OF:
               SEALY MATTRESS COMPANY Northeast Regional Office
           18 Main Street Extension - Plymouth, Massachusetts 02360
                     Phone 508/747-6062 - Fax 508/747-6379

March 17,1997


Mr. Jon Studner
Chief Executive Officer
Mattress Discounters
9822 Fallard Court
Upper Marlboro, MD 20772


Dear Jon:

I want to express my appreciation to Mattress Discounters for our senior
management meeting between our companies on Tuesday, February 18, in Los
Angeles.  We feel it was a win-win situation for Mattress Discounters and Sealy
to be chosen as your single bedding source.

The following were the topics and agreements of our meeting:

1.   Sealy-only stores - Sealy, Inc. will become the only bedding supplier,
     -----------------
     other than bedding produced by Mattress Discounters in its own factories or
     as substitute for such manufacturing, and subcontracted under their own
     label, to Mattress Discounters for three periods as follows:

        July 1, 1997 through December 31, 1997
        January 1, 1998 through December 31, 1998
        January 1, 1999 through June 30, 2000

2.   Price increases - Sealy, Inc. will agree to maintain current Sealy prices
     ---------------
     as charged to Mattress Discounters through the balance of 1997.  Sealy,
     Inc. will agree not to make any product changes on its new Comfort Cell
     products design until 1998 without Mattress Discounters' concurrence.
     Stearns and Foster will continue to be managed under our national product
     and pricing policies.

3.   Returns - Your current return percentage to Sealy, Inc. is 1.78% to total
     -------
     sales.  Mattress Discounters has agreed to maintain its current comfort
     exchange policy on $899 retail and above.  Our common goal is to have Sealy
     returns from Mattress Discounters be less than
<PAGE>

Mr. Jon Studner
March 14, 1997
Page 2

     2% and Comfort Cell products less than 4%. We agreed to maintain the
     current returns procedure and review this program every six months, in
     order to identify and address problems for either Mattress Discounters or
     Sealy.

4.   [REDACTED]

5.   Indemnification - Sealy, Inc. will agree to indemnify, hold harmless, and
     ---------------
     defend Mattress Discounters against any patent and trademark litigation
     resulting from the Sealy Comfort Cell products sold to Mattress Discounters
     during our three-year agreement.

6.   Rebate Program - To the extent permitted by applicable laws, the subsidy
     --------------
     and rebate program will be as set forth on Attachment A.

7.   Wholesale sales - Sealy, Inc. will pay all subsidies and rebate dollars
     ---------------
     based upon Mattress Discounters wholesale sales less the following:
     -   Floor samples
     -   Current promotional products or similar future promotional
         specifications
     -   Product returns

8.   Payment of subsidies - From July 1, 1997 through December 31, 1997, Sealy,
     --------------------
     Inc. will pay a [REDACTED] subsidy on wholesale sales.  Subject to Mattress
     Discounters' remaining in compliance with this agreement and as more fully
     set forth on the attached schedule, beginning January 1, 1998, Sealy, Inc.
     will pay a [REDACTED] subsidy on wholesale sales until purchases beginning
     January 1, 1998 total [REDACTED] and thereafter a [REDACTED] subsidy on
     wholesale sales in excess of [REDACTED], for the balance of the agreement.
     Sealy, Inc. will pay the subsidy monthly by the 30th of each following
     month during the term of the agreement.  Sealy, Inc. will reconcile and pay
     rebate dollars due Mattress Discounters on July 31 in 1998, 1999, and 2000.
     [REDACTED]

9.   Quarterly rebate payment - Sealy, Inc., will pay a [REDACTED] percent
     ------------------------
     rebate on wholesale sales each quarter during the term of the agreement.
     Sealy, Inc. will reconcile the rebate, per the attached schedule, and pay
     the balance of the rebate earned to Mattress Discounters on July 31 in
     1998, 1999, and 2000.  If Mattress Discounters' wholesale sales fall short
     of the [REDACTED] rebate sales volume, [REDACTED]

10.  Initial subsidy and rebate - Upon execution of this initial letter of
     --------------------------
     understanding, and upon notification to Simmons, which notification will
     occur no later than March 1, 1997 that Sealy will be your single-bedding
     source effective July 1, 1997, Sealy, Inc. will pay Mattress Discounters
     [REDACTED].  This payment will be paid to Mattress Discounters
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Mr. Jon Studner
March 14, 1997
Page 3

     [REDACTED]
     per month, commencing March 1, 1997 and continuing on the fifteenth day of
     April, May, and June, 1997.

11.  Pre-agreement subsidy level - Sealy will begin to pay the [REDACTED]
     ---------------------------
     subsidies beginning March 1, 1997 through June 30, 1997.

12.  Term and assignment - The term of this agreement shall be for three (3)
     -------------------
     years subject to its terms.  Mattress Discounters may assign this agreement
     as a result of the transfer of the majority of ownership in or control of
     Mattress Discounters to a third party, other than a bedding manufacturer or
     any of its affiliates, pursuant to which the third party also acquires
     essentially all of Mattress Discounters' then existing stores and other
     retail distribution, it being understood this agreement shall only be
     applicable to (a) the then existing Mattress Discounters locations, (b)
     future retail locations that are owned by Mattress Discounters or
     identified to consumers as "Mattress Discounters" stores, and (c) any
     company that Mattress Discounters directly or indirectly controls which
     sells bedding to the public, including licensees and franchisees,
     regardless of the trade name under which it operates.

13.  Advertising information - Sealy will be provided with the necessary
     -----------------------
     advertising expenditure information required by our co-operative
     advertising policy in a timely manner.

14.  Terms - Sealy, Inc. has agreed to improve your terms to [REDACTED].
     -----
     Mattress Discounters will continue to pay by wire transfer.

15.  Pricing issue - Chuck Dawson and Ray Bojanowski will resolve very minor
     -------------
     pricing issues for Sealy's charge to Mattress Discounters on Roseland
     Pillowtop and Crown Jewel Level I Pillowtop.

16.  Ticks - Chuck Dawson and Ray Bojanowski will resolve some minor tick issues
     -----
     on a couple of Sealy models.

17.  Point of purchase - Chuck Dawson and Ray Bojanowski will work out point-of-
     -----------------
     purchase materials including pillowshams, neon signs, Comfort Cell product
     information, and other Sealy and Stearns & Foster materials for all
     Mattress Discounters stores.

18.  Mattress Discounters commitments - Mattress Discounters has agreed to the
     --------------------------------
     following:
     -   Equal commissions will be paid to sales associates on Sleepcare and
         Sealy, Inc. products at similar retail price points.
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Mr. Jon Studner
March 14, 1997
Page 4

     -   Sealy, Inc. will be Mattress Discounters only bedding supplier, other
         than bedding produced by Mattress Discounters, in all stores and in all
         markets, including all stores Mattress Discounters controls or opens
         using other trade names.

     -   Sealy, Inc. products will maintain a minimum balance of sale of
         [REDACTED] of bedding. Mattress Discounters will be responsible for all
         contests or spiffs paid to retail associates and all contests or spiffs
         will be equal for all brands and products.

19.  Mattress Discounters defined - Whenever the term Mattress Discounters is
     ----------------------------
     used in this letter, it is intended to apply to Mattress Discounters, its
     parent, subsidiaries, affiliates, or assigns, and to any company that
     Mattress Discounters directly or indirectly controls which sells bedding to
     the public, including licensees and franchisees, regardless of the trade
     name under which it operates.

Jon, I appreciate the confidence you have in the Sealy, Inc., management team,
and we look forward to the start of a long-term partnership between the largest
and best specialty store retailer and the largest and best manufacturer of
bedding in the industry.  If you concur that this letter confirms our discussion
and agreement, (a) please sign below and return one copy to me, and (b) accept
the enclosed check for [REDACTED] representing the first pre-payment discussed
in paragraph 10 above.


Sincerely yours,


/s/ Charles L. Dawson
Charles L. Dawson
Regional Vice President of Sales


CLD:lsr
Enc.

                    X /s/ Jon M. Studner
                    ____________________________________________________________
                    Name:   Jon M. Studner
                    Title:  Executive Vice President & Chief Operating
                            Officer
                    Entity: Mattress Discounters
<PAGE>

[REDACTED]